Investment in U.S. net-lease properties rebounded in Q3 2020, driven by strong interest in office assets and, despite COVID-19 related international travel restrictions, an increase in foreign investment, according to the latest research from CBRE.
Net-lease properties are characterized by a lease structure in which the tenant agrees to pay a portion or all of the taxes, insurance fees and maintenance costs in addition to rent. After a weak previous quarter, net-lease investment volume increased by 24.4% quarter-over-quarter in Q3 2020 to $11.7 billion. The net-lease share of all commercial real estate investment activity stood at 18.4% in Q3 2020, well above the five-year average of 11.8%.
The office sector’s share of Q3 2020 total net-lease investment increased 1.1 percentage points from the year-earlier Q3 to 33.6%, while retail’s share grew 5.4 percentage points to 23.2% over the same time period. Industrial accounted for 43.2% of net-lease investment activity, down 6.6 percentage points from Q3 2019 due to tight market conditions causing an increase in asset pricing.
While the COVID-19 downturn and travel restrictions have restricted global investors in acquiring U.S. net-lease assets, Q3 2020 foreign investment volume still rose by 13.3% to $868 million from the previous quarter. Canada, Switzerland, Saudi Arabia and Kuwait are the top countries for inbound capital in U.S. net-lease properties over the past year, accounting for almost two-thirds of all foreign investment in the sector.
“While COVID-19 is creating a disconnect between buyer and seller expectations in the broader market, which has stalled price discovery and slowed investment activity, there remains strong interest in net-lease properties, particularly for mission-critical office assets, with investors seeking to mitigate risk during an economic downturn. Increased demand for essential services like pharmacies, grocery stores and drive-thru fast-food restaurants is also helping to increase investment in net-lease retail assets,” said Will Pike, vice chairman of Net Lease Properties for Capital Markets at CBRE.
The net-lease sector is attractive to investors because the long-term leases and creditworthy tenants considered safe attributes during an economic downturn. Net-lease exhibited a similar trend during the Great Financial Crisis (GFC) when its share of total commercial real estate volume increased to 14.9% for full year 2009 from 6.9% for full year 2007. Net-lease properties’ share of total commercial real estate investment volume has been in the 11%-to-13% range since 2012, suggesting consistent investor demand.
Total net-lease investment volume (comprising office, industrial and retail properties) declined by 50.6% year-over-year in Q3 2020 as the COVID-19 economic downturn stalled commercial real estate transactions. The decline for total U.S. commercial real estate over the same period was deeper at 59.5%.
While large gateway markets continue to garner the most activity, investors are increasingly attracted in high-growth secondary and tertiary markets. Some of the largest four-quarter percentage gains occurred in Oklahoma City (+160.3%), Memphis (+96.0%), Greenville (+67.1%) and Kansas City (+53.1%).
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