U.S. Net-Lease Investment Report Q3 2020

Source: CBRE Research, Real Capital Analytics, Q3 2020.
Note: Single-tenant asset investments used as a proxy for net-lease investment sales.

• 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. Since the start of the COVID-19 economic downturn, however, the net-lease share has grown. Net-lease accounted for 18.4% of all commercial real estate investment volume in Q3, down slightly from a 20-year-record 19.2% in Q2.
• The net-lease sector exhibited a similar trend during the GFC when its share of total commercial real estate investment volume increased to 14.9% in 2009 from 6.9% in 2007, an indication that investors view net-lease investments as less cyclical and more resilient.
• The COVID-19 downturn stalled all commercial real estate investment activity in Q2; however, volume rebounded in Q3. Net-lease investment volume (using single-tenant asset transactions as a proxy) increased by 24.4% quarter-over-quarter to $11.7 billion, less than the 30.3% rise in total investment volume. For the year ending Q3 2020, net-lease investment volume fell by 28.9% to $59.5 billion.
• Long-term leases and creditworthy tenants that provide greater investment security are attractively safer attributes for investors looking to mitigate risk during an economic downturn.

Source: CBRE Research, Real Capital Analytics, Q3 2020.
Note: Some numbers may not total due to rounding. Single-tenant asset transactions used as a proxy for net-lease investment sales.

Source: CBRE Research, Real Capital Analytics, Q3 2020.
Note: Real Capital Analytics only tracks properties and portfolios of at least $2.5 million. Therefore, the total net-lease acquisitions volume is understated, especially since a notable share of retail transactions are below $2.5 million.

• 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.
• Increased demand for essential services like pharmacies, grocery stores and drive-thru fast-food restaurants helped prop up investment in net-lease retail assets. While industrial volume increased quarter-over-quarter, the rate was significantly less than that of office and retail assets due to tight market conditions causing an increase in industrial asset pricing.

Source: CBRE Research, Real Capital Analytics, Q3 2020.
Note: Single-tenant asset transactions used as a proxy for net-lease investment sales.

Source: CBRE Research, Real Capital Analytics, U.S. Department of the Treasury, Q3 2020.

• The average net-lease cap rate remained at 6.2% in Q3 as sellers’ and buyers’ pricing expectations were too far apart. COVID-19 led to a wider bid-ask gap, which stalled price discovery and slowed investment activity. Properties that did transact held their pricing.
• Net-lease office and retail cap rates both remained unchanged in Q3 at 6.4% and 6.2%, respectively. Industrial cap rates ticked down by 10 bps to 6.0%.
• Year-over-year, industrial cap rates fell 20 bps, while retail and office cap rates stayed the same.

Source: CBRE Research, Real Capital Analytics, Q3 2020.

• Net-lease investment by REITs increased the most, up by 176% quarter-over-quarter to $1.9 billion.
• Private investors, the largest buyer group, accounted for $5.6 billion in Q3, an increase of 33.0% from Q2.
• Institutions and equity funds maintained the same level of investment at $3.4 billion for the quarter, while investment by international buyers rose 13.3% to $868 million.

Source: CBRE Research, Real Capital Analytics, Q3 2020.

• International buyers accounted for 7.4% of net-lease investment volume in Q3, down from 8.1% in Q2. The COVID-19 downturn and travel restrictions have dampened international buying. Even so, Q3 international volume rose by 13.3% or about $100 million.
• International investment in U.S. net-lease properties totaled $5.9 billion for the year ending Q3, down by 40.1% from the same period last year. International investment in all U.S. commercial real estate fell by 43.2%.
• Seattle, Dallas/Ft. Worth, Los Angeles, Chicago and New York City had the most net-lease international investment over the past four quarters.

CROSS-BORDER NET-LEASE INVESTMENT BY COUNTRY OF ORIGIN: LAST FOUR QUARTERS

Source: CBRE Research, Real Capital Analytics, Q3 2020.
Note: Investment for the year ending in Q3 2020.

• Canada, Switzerland, Saudi Arabia and Kuwait have been the top countries of origin for international investment in U.S. net-lease properties over the past four quarters, accounting for roughly two-thirds of total international volume.
• Canadian investors primarily targeted industrial properties. Investors from Switzerland, Saudi Arabia, Kuwait and Japan overwhelmingly preferred office assets.
• Because international investors prefer large assets or portfolios, they are less attracted to the retail sector.

Source: CBRE Research, Real Capital Analytics, Q3 2020.
Note: Includes only single-asset investments; excludes portfolios and assets for redevelopment.