Foreign Investors in U.S. Real Estate Net Lease Properties Increases Despite Travel Restrictions

CBRE, Los Angeles, said U.S. net-lease property investment rebounded during the third quarter, driven by strong interest in office assets and increasing foreign investment.

After a weak second quarter, net-lease investment volume increased nearly 25 percent to $11.7 billion in the third. The net-lease share of all commercial real estate investment activity stood at 18.4 percent, well above the 11.8 percent five-year average, CBRE reported.

While the COVID-19 downturn and travel restrictions have restricted global investors from some U.S. net-lease asset acquisitions, third-quarter foreign investment volume rose by 13.3 percent to $868 million from the previous quarter, CBRE said. Canada, Switzerland, Saudi Arabia and Kuwait were 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.

“While COVID-19 is creating a disconnect between buyer and seller expectations in the broader market–which has stalled price discovery and slowed investment activity–there remains strong interest in net-lease properties, particularly for mission-critical office assets, with investors seeking to mitigate risk during an economic downturn,” said CBRE Vice-Chairman of Net Lease Properties for Capital Markets Will Pike. “Increased demand for essential services like pharmacies, grocery stores and drive-through fast-food restaurants is also helping to increase investment in net-lease retail assets.”

Pike called the net-lease sector attractive to investors because the long-term leases and creditworthy tenants are considered safe attributes during an economic downturn. Net-lease assets exhibited a similar trend during the Great Recession when their share of total commercial real estate volume increased from 6.9 percent in 2007 to nearly 15 percent in 2009. Net-lease properties’ share of total commercial real estate investment volume has been in the 11 percent to 13 percent range since 2012, suggesting consistent investor demand.

The office sector’s share of third-quarter total net-lease investment increased 1.1 percentage points from the year-ago third quarter to 33.6 percent, while retail’s share grew 5.4 percentage points to 23.2 percent over the same time period. Industrial accounted for 43.2 percent of net-lease investment activity, down 6.6 percentage points from third-quarter 2019 due to tight market conditions causing an increase in asset pricing.

Pike said large gateway markets continue to garner the most activity but noted investors are increasingly attracted in high-growth secondary and tertiary markets. Some of the largest four-quarter percentage gains occurred in Oklahoma City, (+160 percent), Memphis (+96 percent), Greenville (+67 percent) and Kansas City (+53.1 percent).