Favored Net Lease Asset Classes Shift in Response to the Times

Hands down, the industrial asset class has become a favorite among net lease investors and, for that matter, the larger commercial real estate space. But behind that category, retail and office are jockeying for favor as well, with some surprising results. 

In general, the net lease market has done well since the pandemic with its share of the total market increasing to 15.5%, Revathi Greenwood, global head of Data and Insights at Cushman & Wakefield, tells GlobeSt.com. Greenwood is delivering the keynote address at the GlobeSt. NET LEASE Conference, which is kicking off today. 

But the allocation of investment into net lease has shifted since the heath crisis, she notes. Prior to the pandemic, retail was a quarter of the market. Then, during the crisis, it was roughly split between office and industrial. “Retail has now shrunk to 16% and office is one-third,” she says.

Now these trends are in a state of flux, guided by changing conditions in the net lease market as well as developments in the larger asset class. Office, for example, is beginning to open up after fears that companies would significantly retract their presence. “Most employers have come on the record of saying that while flexibility is something they want to give to their workforce, the benefit of being back in the office and the ability to drive collaboration and innovation is important as well,” Greenwood says. More jobs will be added to US payrolls in the coming months and years and “over the next three years to four years we will come back to an upswing in office demand.”

Retail also appears to be making a comeback, says Mark Maughan, managing director of Net Lease Investments at Sundance Bay. Maughan, as well, is participating in the GlobeSt. NET LEASE conference.

“There is massive pent up demand and people want to get out,” he says. During the pandemic retail became a four letter word but now tenants are wanting to sign leases, he continues. Indeed, negotiating power for retail leases has moved back to the landlords. “During the pandemic tenants tried to exercise what [influence over their leases] they could and landlords worked with them but demand is back and we are seeing landlords take back control.”

Net lease investors are also favoring certain markets, Greenwood adds, with Boston one of the top markets today. Many California markets are also doing well, along with Dallas and Houston, particularly in the industrial and retail categories. Miami has come up in the league tables as well as Philadelphia, Chicago and New York, for retail.

These trends are no accident of course. They are dependent on the product available in these cities and the presence of strong, creditworthy tenants willing to sign long-term leases, Greenwood says.