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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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2019 revenue). The company has more than 100,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 530 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
