Net Lease Trends in the New Year: What to Expect in 2017

By Lanie Beck, Director of Research & Joshua Campbell, Senior Director of Business Information and Strategy, Stan Johnson Co.: Why 2017 could be another record-setting year for net lease sales.

Lanie-and-Josh,-Stan-JohnsonPer our west coast regional director, Myles Helm, a 34-year CRE industry veteran, the last several weeks of 2016 were busier than any year-end push he could remember. Through the first three weeks of January, the market has shown no signs of slowing down. As a new year begins, the corporate real estate community is asking the following question: what should we expect from the net lease market in 2017?

To answer this question, we must begin by looking at what happened in 2016. The market reacted strongly to a number of outside influences, getting hit early on with economic uncertainties – everything from Brexit fears to tightening lending standards to hesitancy stemming from the U.S. presidential election. This resulted in cautious, deliberative investor behavior. Interestingly, the market continued its growth path despite these challenges. At the end of third quarter, we predicted annual net lease sales volume totals to fall between $46.8 billion and $51.9 billion. However, final indicators point to a total that surpassed our high-side projections. Near unprecedented levels of deal volume to close the year drove reported sales totals to more than $52.4 billion.

While sales volumes were down approximately 17 percent relative to the previous year, 2016 was still one of the strongest years for net lease investment sales. Latter-half fourth quarter sales activity pushed annual totals beyond levels reported in 2014, making it the second highest volume year in the last 10 years. At Stan Johnson Co., in the final six weeks of the year, we saw net lease activity rise more than 20 percent in terms of transaction value and 40 percent in the number of transactions, relative to the same period in 2015. The market as a whole reported similar boosts in activity, signaling a significant shift in the investor mindset. The uncertainty that cloaked investors for the first nine months of the year lifted almost overnight, causing fourth quarter volumes to outpace the previous three quarters’ average by 28 percent.

With such a strong push to end the year, should real estate investors and executives expect to see that momentum carry into 2017? According to Helm, “First-quarter pending transaction volumes here at Stan Johnson Co. are much higher compared to the same period in 2016. We expect a year-over-year increase in the first quarter of this year.”

So far, there is no sign that transaction closings are slowing – at least not yet. At Stan Johnson Co., transaction volumes are up on both the number of closings and dollar volume, with sales totals in the first three weeks of January already surpassing last January’s reported monthly totals. We expect the overall market to follow suit, although we will certainly be on the lookout for any signs of a slowdown. First-quarter activity tends to set the tone for the year; strong levels early on traditionally lead to sustained levels of activity for the remaining quarters, although not always. It is possible that all the pent-up anxiety of early 2016 led to an explosion of activity in recent weeks, and we are still feeling those effects. If the market experiences outside influences as it did in 2016 – whether political or economic – the market may slow itself down and report lower levels of activity in the coming quarters. However, if we continue to ride this wave of high investment activity, 2017 could result in another record-setting year for net lease sales.