According to CBRE, a strong rising demand for U.S. net-lease real estate led to $57.8 billion in investment volume in 2017 — the second-highest annual total since CBRE began tracking the market in 2002.
U.S. net-lease transaction volume — comprising office, industrial and retail properties — was up by 3.3% from 2016. Investment volume in 2018 is expected to be comparable, with increasing investor appetite for net-lease office and industrial assets.
The global search for yield and a push for portfolio diversification are driving foreign investors to the U.S. net-lease market, with Canada, South Korea and China the top buyers. Over the past four years, foreign investors increased their holdings of U.S. net-lease properties more than any other investor group, adding a net balance of nearly $10 billion to their books since 2014. This is 65% more net investment than that of private equity investors over the same period. Cross-border investment in U.S. net-lease properties has risen to $6 billion annually over the past three years from $2.1 billion annually between 2003 and 2014, increasing foreign investors’ share of the market to more than 11% from 8%.
“Net-lease assets are well-positioned to satisfy both yield and diversification requirements, as well as offer a relatively low-risk investment option. Foreign investors are diversifying their portfolios with U.S. net-lease properties due to a persistent lack of yield opportunities abroad, and their increased market share could signal the start of a longer-term upward trend,” said Guy Ponticiello, Managing Director, Corporate Capital Markets.
The industrial sector drove gains in overall net-lease volume in 2017, expanding by 12.5% year-over-year. Net-lease retail volume remained stable year-over-year in 2017, while net-lease office volume fell modestly–the first annual decrease since 2011. This decline is largely attributable to a relative lack of opportunities in gateway markets, where both prices and competition for assets are higher, rather than a pronounced drop in net-lease office demand. This conclusion is supported by heightened transaction activity in high-growth secondary and tertiary markets with available opportunities.
Overall net-lease cap rates softened slightly last year, though certain asset classes saw continued compression. Spreads remained essentially unchanged from 2016 and were in line with long-term averages at about 400 basis points (bps). This buffer should be sufficient to maintain attractive margins in 2018, as net-lease cap rates are expected to stabilize.
“Investor interest in the net-lease sector is expected to remain strong in 2018 as capital availability–particularly from institutions–remains high. After showing increased interest last year, private equity firms and hedge funds are expected to increase investment as they transition from “window shoppers” to buyers. Cross-border investors will maintain their portfolio diversification efforts and increase their net acquisitions volume in 2018,” said Will Pike, Managing Director, Corporate Capital Markets, CBRE.
COURTESY: WORLD PROPERTY JOURNAL