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9/04/20
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This report was provided by CBRE
Net-lease investment fell significantly in Q2 2020, but comprised the highest share of total volume on record amid a sharp decline in commercial real estate investment activity caused by the COVID-19 pandemic. Net-lease investment (comprising office, industrial and retail properties) reached 20.2% of total commercial real estate investment in Q2 2020, up from 13.3% in Q1 2020—the sector’s highest percentage on record, according to the latest research from CBRE.
On a list of top 20 markets, Greater Los Angeles and the Inland Empire ranked third and fourth, respectively, in terms of total investment volumes during the quarter. Net-lease investments in Q2 fell 70% to $342 mil in Los Angeles while volumes for the year ending in Q2 were down 32.8% to $3.17 bil. In the Inland Empire, net-lease investments fell 54.5% to $336 mil in the quarter but were still up 42.3% over the past four quarters at $2.63 bil. Orange County ranked 18th on the list with an increase in volumes for the year ending in Q2 2020 of 50.4% to $1.5 bil.
“Amid all the volatility and concern in the market place, investors are still looking to deploy capital,” said Orange County-based Executive Vice President Anthony DeLorenzo. “Many are turning to long-term net leased assets as a potential safe haven. The net-lease space has also seen more liquidity from lenders than some of the multi-tenant product in the market. Having lenders on board has made buying these types of assets not only a hedge but interesting cash flow plays considering the attractive leveraged returns we are seeing.”
Greater Los Angeles was among the top five markets with the most net-lease foreign investments in the past four quarters.
"The demand for long-term net-leased properties in Southern California has really come from all buyer groups, including high net-worth investors, institutions, funds and foreign money,” said DeLorenzo. “That said, the most aggressive capital in our region has clearly been from the 1031-exchange buyers.”
The net-lease sector’s performance relative to the rest of the commercial real estate asset class reflects investors’ attraction to 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.
Net-lease investment volume declined by 61.8% year-over-year in Q2 2020 to $8.1 bil 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 69.9%.
The industrial sector’s share of total net-lease investment increased to 48% in Q2 2020, while the office and retail sector’s shares fell. Retail’s share fell only moderately year-over-year to 25.4% from 28.7%, as investors remained attracted to retailers providing essential services, such as pharmacies and grocery stores. The uncertainty surrounding the future of workplaces dampened interest in the office sector, with its share of net lease investment falling to 26.6% from 37.2% year-over-year.
Foreign investment in U.S. net-lease properties totaled $6.5 bil for the year ending Q2 2020—a 36.5% decline from the same period last year. Canada, Germany, Spain and Switzerland are the top countries for inbound capital in U.S. net-lease properties over the past 24 months, accounting for almost two-thirds of all foreign investment in the sector.
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