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Office Assets Drive Rebound in Net-Lease Investment Activity

12/16/20

This report was provided by real estate services firm CBRE

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 bil. 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.

Los Angeles and Orange County were among the top five markets with the highest net-lease investment volume in the third quarter, following New York City, Dallas/Fort Worth and Boston. Los Angeles totaled $581 mil in the quarter, down 52.1% year over year, while Orange County totaled $503 mil, down 34.4% from the same period the prior year. The $355 mil sale of two Broadcom Inc-occupied buildings at Fivepoint Gateway’s office campus to PRP Real Estate Invesmtent Management in the OC constituted the largest net-lease transaction in the third quarter.

Los Angeles has also been among the top five markets for cross-border investments for the past four quarters. “Right now, single-tenant properties are much more desirable for office buyers compared with multi-tenant product,” said Newport Beach-based Executive Vice President Anthony DeLorenzo. “This is in large part due to the uncertainty among office investors as to how the next one to three years may play out. Longer-term triple net-leased product generally provides more safety and ease of management.” He added, “Single-tenant office product has also fared much better in the financing market, which has help to keep values stable in our region.”

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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