Overseas Investors Lead Net-Lease Investment Increases
Rising demand for U.S. net-lease real estate led to nearly $58 billion in investment volume last year, up 3.3 percent from 2016, representing the second-highest total since 2002, reported CBRE, Los Angeles.
The sector’s volume should be comparable this year, with increasing appetite for net-lease office and industrial assets especially, the company’s April Net-Lease Market Trends Report said.
“The global search for yield and a push for portfolio diversification are driving foreign investors to the U.S. net-lease market,” CBRE said. “Over the past four years, foreign investors increased their holdings of net-lease properties more than any other investor group. Canada, South Korea and China have been the top buyers.”
Net-lease assets provide long-term passive cash flows similar to corporate bonds, CBRE noted. “The net-lease market presents an alternative to investors utilizing this strategy, but who are concerned about balancing risk with sufficient returns–an opportunity to diversity a portion of their portfolios.”
Overall net-lease cap rates rose slightly last year compared to 2016. Net-lease retail and office cap rates rose 21 and 11 basis points, respectively. Net-lease industrial cap rates compressed 8 basis points, CBRE said. Spreads remained essentially unchanged from 2016, in line with long-term averages at about 400 basis points. “This buffer should be sufficient to maintain attractive margins in 2018, as net-lease cap rates are expected to stabilize,” the report said.
Marcus & Millichap, Calabasas, Calif. said “promising” retail metrics have supported renewed interest in the sector. “Although news media often focus on the downfall of well-established retail brands, 2017 witnessed far more store openings than closures with a net figure of roughly 4,000 stores,” M&M said. “Dollar stores continue to perform well due to their inexpensive convenience items crafted to serve low-income households. Grocery stores remain a highly sought-after asset as well, which can be largely attributed to the continued improvement of the overall experience.”
In addition, dine-in options, wine and cheese bars and more quality products keep foot traffic high and occupancy strong for owners of these net-lease assets, Marcus & Millichap said. Necessity-based outlets such as grocery stores have also been relatively resistant to the rise of e-commerce.
Marcus & Millichap said national and regional banks have stepped in as key lenders for net-lease retail properties as commercial mortgage-backed securities lending slipped due to heightened risk aversion among CMBS lenders. “In general, credit standards have held steady and the trend should continue into 2018 as lenders search for deals,” the report said. “Many originators are becoming increasingly selective about big-box retail deals as several national retailers have announced closures. Strip centers with grocery-anchored or service-oriented tenants may be favored opportunities moving forward. Construction lending will remain conservative and below-average completions will likely benefit vacancy as the retail landscape evolves.”
