Net-Lease Comprises Bigger Share of Much Less Commercial Real Estate Investment Activity
Global commercial property consultant CBRE is reporting this week that net-lease investment in the U.S. fell significantly in Q2 2020, but comprised the highest share of total volume on record amid a sharp decline in commercial real estate investment activity caused by the COVID-19 pandemic.
Net-lease investment (comprising office, industrial and retail properties) reached 20.2% of total commercial real estate investment in Q2 2020, up from 13.3% in Q1 2020--the sector's highest percentage on record, according to the latest research from CBRE.
The net-lease sector's performance relative to the rest of the commercial real estate asset class reflects investors' attraction to the long-term leases and creditworthy tenants considered safe attributes during an economic downturn. Net-lease exhibited a similar trend during the Great Financial Crisis (GFC) when its share of total commercial real estate volume increased to 14.9% for full year 2009 from 6.9% for full year 2007. Net-lease properties' share of total commercial real estate investment volume has been in the 11%-to-13% range since 2012.
"Similar to the GFC 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. We are seeing an uptick in capital requests for long-term net-lease assets and sale-leaseback financing opportunities. We foresee this mandate lasting through the remainder of the year and well into 2021 given interest rate forecasts and the need for compelling risk-adjusted-returns," said Will Pike, vice chairman of Net Lease Properties for Capital Markets at CBRE.
Net-lease investment volume declined by 61.8% year-over-year in Q2 2020 to $8.1 billion as the COVID-19 economic downturn stalled commercial real estate transactions. The decline for total U.S. commercial real estate over the same period was deeper at 69.9%.
While large gateway markets continue to garner the most activity, investors are increasingly attracted in high-growth secondary and tertiary markets. Some of the largest four-quarter percentage gains occurred in Memphis (+96%), Austin (+68.5%), San Antonio (+62.3%), Philadelphia (+51%) and Cincinnati (+50.5%).
The industrial sector's share of total net-lease investment increased to 48% in Q2 2020, while the office and retail sector's shares fell. Retail's share fell only moderately year-over-year to 25.4% from 28.7%, as investors remained attracted to retailers providing essential services, such as pharmacies and grocery stores. The uncertainty surrounding the future of workplaces dampened interest in the office sector, with its share of net lease investment falling to 26.6% from 37.2% year-over-year.
Foreign investment in U.S. net-lease properties totaled $6.5 billion for the year ending Q2 2020--a 36.5% decline from the same period last year. Canada, Germany, Spain and Switzerland are the top countries for inbound capital in U.S. net-lease properties over the past 24 months, accounting for almost two-thirds of all foreign investment in the sector.
U.S. home prices increased 6.7% in September 2020, compared with September 2019, marking the fastest annual acceleration since May 2014. On a month-over-month basis, home prices increased by 1.1% compared to August 2020.
According to the Mortgage Bankers Association's latest Commercial/Multifamily Mortgage Debt Outstanding quarterly report, the level of commercial/multifamily mortgage debt outstanding rose by $43.6 billion (1.2 percent) in the second quarter of 2020.
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