Net Lease Investors Shy Away From Office Deals

If industrial assets are the hero in the net lease sector’s pandemic story, office assets are the villain. The asset class is in a state of total flux, and investors on the State of the Industry: Post-Pandemic Recovery panel at the GlobeSt.com Net Lease conference were wary. Most of speakers said they are opting to avoid the asset class until the dust settles.

Most investors—and attendees—agreed that most companies would adopt a hybrid work model. The biggest question for panelists: what does that mean? Is hybrid one or two days per week in a headquarters office? Is it one day a month? Is it regional offices? Less space? No one knows the answer to these questions yet. Most companies are still curating an appropriate work schedule. “Office is stuck with a lot of questions,” Daniel Taub, SVP and national director of retail and net lease divisions at Marcus & Millichap, said.

Gino Sabatini, managing director and head of investments at W. P. Carey, agreed that offices would transition to some sort of hybrid work model, but he believes that it will ultimately diminish demand.

Geography is also playing a role in the viability of the asset class. According to Coler Yoakam, senior managing director of corporate finance and net lease platform leader at JLL, leasing overall is down 30% for the year, but in the Sunbelt region, leasing activity has already returned to pre-pandemic levels, and 40% of new leases getting done have 10-plus-year terms attached. “That is signaling innovation that is happening in office,” he said. “The need is always going to be there. It doesn’t lose its relevance as an asset class.

To be fair, many of the panelists weren’t doing office deals even before the pandemic. Sabatini said that W. P. Carey hadn’t done an office deal in 5 years because the asset, in general, is too challenging to re-tenant. “When we underwrite at year 10, we can’t make it work,” he said.

Chris Capolongo, managing director at Angelo Gordon, agreed that office is too expensive to re-tenant, and said that he would only do an office deal if there was a long-term tenant that was likely to maintain occupancy.

Taub’s clients on the other hand were bullish on office properties prior to the pandemic. In fact, office accounted for two-thirds of his business with industrial making up the additional third. Now, it’s the opposite.