Hunger for Yield Driving Big Gains in Net Lease Sector
U.S. net-lease investment in 2019 is on pace to surpass last year’s record level, with an increasing number of domestic and foreign investors attracted to this asset class by the prospect for strong risk-adjusted returns, according to the latest research from CBRE.
Net-lease investment — comprising office, industrial and retail properties — increased by 30.2 percent year-over-year to $20.9 billion in Q3 2019, the third-highest quarterly total on record.
Investment volume in Q3 2019 was driven by a 48.5 percent year-over-year gain for the industrial sector and a 22.1 percent gain for the office sector, with the retail sector increasing by 8.8 percent. Net-lease investment volume year-to-date through Q3 2019 climbed 24% year-over-year to $55.2 billion and outpaced the broader commercial real estate market. The net-lease share of total commercial real estate investment stood at 14.6% in Q3 2019, one of the highest quarterly shares of this cycle and higher than the 11%-to-13% range held since 2012.
This suggests sustained investor demand for net-lease assets that will see full-year volume surpass 2018’s record total of $69.6 billion.
“The net-lease sector continues to perform strongly with significant levels of year-over-year growth across office, industrial and retail assets. We expect this trend to continue as both domestic and international buyers are placing a heightened emphasis on achieving the high risk-adjusted returns provided by this asset class,” said Will Pike, vice chairman of Net Lease Properties for Capital Markets at CBRE.
Investors are increasingly focused on net-lease investment opportunities in high-growth secondary markets, with the Inland Empire (Southern California) and Portland showing the largest percentage gains.
Among gateway markets, Los Angeles and Miami had the largest year-over-year gains.
The global search for yield and portfolio diversification is attracting international investors to the U.S. net-lease market. Cross-border capital for net-lease properties reached $6.8 billion year-to-date through Q3 2019 — up 18.8 percent from the same period last year.
Foreign buyers accounted for just 4.7 percent of net-lease investment volume in Q3 2019, compared with their 18.8% share in Q2 2019. Miami, Dallas/Ft. Worth, Los Angeles, San Francisco, and Charlotte received the most foreign capital for net-lease investment in Q3 2019.
Over the past two years, the top countries for inbound capital are Canada, Germany and Singapore.
Foreign investment in U.S. net-lease properties has averaged more than $8 billion annually over the past four years from $3.1 billion annually between 2011 and 2014.