Net Lease Investment Falls But Leads CRE Activity: CBRE
- Sep 04, 2020
The pandemic-induced economic downturn continues to challenge the commercial real estate industry—and not even net-lease assets, a favorite among investors for their durability, escaped unscathed in the second quarter of 2020, according to CBRE.
Yet, the firm’s latest U.S. Net-Lease Investment Report noted, despite a drastic decline in net-lease investment, activity in the sector accounted for the highest share of total investment volume on record.
In the second quarter, net-lease office, industrial and retail investment volume toppled a whopping 61.8 percent year-over-year to just $8.1 billion, but total U.S. commercial real estate investment activity fared even worse, plummeting 69.9 percent. However, with investor confidence buoyed by the net-lease sector’s long-term leases and creditworthy tenants, the net-lease sector reached new heights, jumping approximately 7 percentage points quarter-over-quarter, accounting for 20.2 percent of total CRE investment and marking the sector’s highest ever percentage of total investment.
“Net-lease is a popular investment vehicle since it is a more risk-averse investment strategy,” Will Pike, vice chairman of Net Lease Properties for Capital Markets at CBRE, told Commercial Property Executive. “A similar trend was observed during the previous downturn,” he noted. During the Great Recession, the net-lease sector’s share of total CRE volume reached a high of 14.9 percent in 2009 and, since 2012, it has maintained an average share between 11 percent and 13 percent.
It’s the industrial sector’s moment. As is the case with practically every measure of the CRE industry during the pandemic, the industrial sector is taking the lead in net-lease investment activity. In the second quarter, net-lease industrial’s share of total net-lease investment rose to 48 percent from 34.1 percent in the second quarter of 2019, while the office and retail sectors’ share dropped. “The magnitude of the shift in market share towards industrial was interesting and to be expected, given the attractiveness of the sector with e-commerce,” Pike said.
The net-lease retail sector—now supported by the investors’ attraction to pharmacies, grocery stores and other assets in the essential services category—logged a moderate year-over-year decline from 28.7 percent to 25.4 percent. The office sector saw a more pronounced decrease, falling from 37.2 percent in the second quarter of 2019 to 26.6 percent in the second quarter of 2020 due to uncertainty about the future of workplaces.
More of the Same
The forecast for net-lease investment remains positive, and CBRE is seeing the evidence in real time as its clients’ capital requests for long-term net-lease and sale-leaseback financing opportunities go on the rise.
“Some operators have been expressing the sentiment that there is more demand than supply and that deals are actively trading as more investors recognize the attractiveness of the net-lease sector’s risk-adjusted returns,” Pike noted. He went on to add that the momentum is expected to continue into 2021, as institutional buyers have cash reserves that need to be deployed and some investors are “looking for safety without jumping into bonds.”
Read the full report on CBRE’s website.