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6/10/21
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This report was provided by CBRE
Investment in U.S. net-lease properties was close to pre-pandemic levels in Q1 2021, driven by robust institutional acquisition activity, increased interest in office assets as return-to-the-workplace plans gained momentum and, despite COVID-19 related international travel restrictions, resilient 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. While net-lease investment activity (comprising office, industrial and retail properties) decreased by 2.6% year-over-year in Q1 2021 to $14.3 bil, volume was up by 10% from pre-pandemic Q1 2019. The decline for total U.S. commercial real estate volume in Q1 2021 was deeper at 18.3% year-over-year.
Los Angeles and Orange County placed among the top 20 markets for total net-lease investments in the first quarter, with LA in spot No. 2 and the OC in 18th place. In Orange County, Q1 net-lease property investments increased 1.7% year over year to $223 mil.
Los Angeles placed No. 5 in office net-lease investment activity, more than doubling to $271 mil. LA also took first place in the industrial sector, despite a slight 1.3% decline in volume after a record 2020, while Orange County investment volume in the industrial sector nearly doubled to $191 mil.
Los Angeles was among the top five markets with the most net-lease international volume. Industrial and office assets accounted for 91% of all international net-lease investments in these markets.
“We continue to see strong demand for assets that are in superb strategic locations with one or two high-quality tenants to provide stability during uncertain times,” said Executive Vice President Anthony DeLorenzo. “In-place net leases diminish or even erase substantial economic risks while providing exceptional ease of ownership and long-term, stable cash flow.”
He added, “Recent transactions demonstrate substantial demand for these types of investments from 1031-exchange buyers. With potential tax changes underway, these investors are pushing even more money into the space right now.”
The office sector’s share of total net-lease investment volume increased by 5.2 percentage points from the year-earlier Q1 to 41.5%, with its largest first quarter volume on record at nearly $6 bil. The industrial sector continued to attract the most net-lease capital with its share remaining relatively unchanged at 43.4%, while the retail sector’s share fell by 5.4 percentage points to 15.1%.
Institutional and equity funds, the largest net-lease buyers this quarter, increased their acquisition activity by 40% year-over-year in Q1 2021 to $6.7 bil. Private investment in net-lease properties grew by 6.7% over the same period to $6.3 bil. REIT net-lease investment volume was down by 44% year-over-year in Q1 2021 to $1.4 bil.
While the COVID-19 downturn and travel restrictions have restricted international investors in acquiring U.S. net-lease assets, Q1 2021 foreign investment volume still increased by 8.7% year-over-year to $1.7 bil. International buyers accounted for 11.6% of total net-lease volume in Q1 2021, above the five-year Q1 average of 11.1%. San Francisco, Richmond, Boston, Los Angeles and New York City had the most net-lease international investment in Q1 2021. Singapore, South Korea, Canada and Kuwait comprised 75% of all offshore capital targeting U.S. net-lease properties for the year ending Q1 2021.
The net-lease sector is attractive to investors because the long-term leases and creditworthy tenants are considered safe attributes during an economic downturn. During the COVID-19 pandemic, the net-lease share of total commercial real estate volume increased to 14.7% in 2020 from 13.5% for full year 2019. The sector exhibited a similar trend during the GFC when its share increased to 15.1% for full year 2009 from 8.7% for full year 2007. For the year ending in Q1 2021, while total net-lease investment volume declined by 25.9% compared with the same period last year as the COVID-19 economic downturn stalled transaction activity, it comprised 15.4% of total commercial real estate investment volume.
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