CBRE: Net-Lease Comprises Bigger Share of Much Lower CRE Investment

CBRE, Los Angeles, said net-lease investment fell significantly in the second quarter but comprised the highest share of total volume on record amid a sharp pandemic-related commercial real estate investment activity decline.

Net-lease investment (comprising office, industrial and retail properties) reached 20.2 percent of total commercial real estate investment during the quarter, up from 13.3 percent a year before–the sector’s highest percentage on record, CBRE said.

“Similar to the Great Financial Crisis trend we experienced over a decade ago, net lease investment continues to attract demand during this downturn as investors are seeking long-term dependable cash flows,” said CBRE Vice Chairman of Net Lease Properties for Capital Markets Will Pike. “We are seeing an uptick in capital requests for long-term net-lease assets and sale-leaseback financing opportunities.”

Pike said CBRE forecasts this mandate could last through the remainder of the year and well into 2021 given interest rate forecasts and the need for compelling risk-adjusted-returns.

The net-lease sector’s performance relative to other commercial real estate asset types reflects investors’ attraction to the long-term leases and creditworthy tenants considered safe attributes during an economic downturn. Net-lease investments exhibited a similar trend during the Great Financial Crisis when its share of total commercial real estate volume increased to nearly 15 percent for full-year 2009 from 6.9 percent for full-year 2007. Net-lease properties’ share of total commercial real estate investment volume had remained in the 11 percent-to-13 percent range since 2012.

Net-lease investment volume declined by more than 60 percent year-over-year in the second quarter to $8.1 billion as the COVID-19 economic downturn stalled commercial real estate transactions. But the decline for total U.S. commercial real estate over the same period was even deeper at nearly 70 percent.

Large gateway markets continue to garner the most net-lease activity, but investors are increasingly attracted to high-growth secondary and tertiary markets, CBRE reported. Some of the largest four-quarter percentage gains occurred in Memphis, Tenn. (up 96 percent), Austin, Texas (up 68.5 percent), San Antonio, Texas (up 62.3 percent), Philadelphia (up 51 percent) and Cincinnati (up 50.5 percent).

Foreign investment in U.S. net-lease properties totaled $6.5 billion for the year that ended in the second quarter–a 36.5 percent decline from the same period a year before. Canada, Germany, Spain and Switzerland were the top countries for inbound capital in U.S. net-lease properties over the past 24 months, accounting for nearly two-thirds of all foreign investment in the sector.