Foreign Investors Buy U.S. Net-Lease Properties, More Than Others
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.