According to new research from CBRE, investment in U.S. net-lease properties was close to pre-pandemic levels in Q1 2021, driven by robust institutional acquisition activity, increased interest in office assets as return-to-the-workplace plans gained momentum and, despite COVID-19 related international travel restrictions, resilient foreign investment.
Net-lease properties are characterized by a lease structure in which the tenant agrees to pay a portion or all of the taxes, insurance fees and maintenance costs in addition to rent. While net-lease investment activity (comprising office, industrial and retail properties) decreased by 2.6% year-over-year in Q1 2021 to $14.3 billion, volume was up by 10% from pre-pandemic Q1 2019. The decline for total U.S. commercial real estate volume in Q1 2021 was deeper at 18.3% year-over-year.
"Much like the Global Financial Crisis (GFC) trend we experienced over a decade ago, net-lease properties continue to attract interest during this downturn as investors seek long-term dependable cash flows. Interest in the office sector is on the rise, with strong demand for mission-critical assets as COVID-19 guidance changes and employees begin to return to the workplace," said Will Pike, vice chairman of Net Lease Properties for Capital Markets at CBRE.
The office sector's share of total net-lease investment volume increased by 5.2 percentage points from the year-earlier Q1 to 41.5%, with its largest first quarter volume on record at nearly $6 billion. The industrial sector continued to attract the most net-lease capital with its share remaining relatively unchanged at 43.4%, while the retail sector's share fell by 5.4 percentage points to 15.1%.
Institutional and equity funds, the largest net-lease buyers this quarter, increased their acquisition activity by 40% year-over-year in Q1 2021 to $6.7 billion. Private investment in net-lease properties grew by 6.7% over the same period to $6.3 billion. REIT net-lease investment volume was down by 44% year-over-year in Q1 2021 to $1.4 billion.
Large gateway markets continue to garner the most U.S. net-lease investment activity, with Boston being the top target in Q1 2021. Net-lease investors are also increasingly attracted to high-growth secondary and tertiary markets, with some of the largest four-quarter percentage gains occuring in Provo, Utah (+639.4%); Trenton, New Jersey (+609.8%); Savannah, Georgia (+451.5%); and Honolulu, Hawaii (+258.7%).
While the COVID-19 downturn and travel restrictions have restricted international investors in acquiring U.S. net-lease assets, Q1 2021 foreign investment volume still increased by 8.7% year-over-year to $1.7 billion. International buyers accounted for 11.6% of total net-lease volume in Q1 2021, above the five-year Q1 average of 11.1%. San Francisco, Richmond, Boston, Los Angeles and New York City had the most net-lease international investment in Q1 2021. Singapore, South Korea, Canada and Kuwait comprised 75% of all offshore capital targeting U.S. net-lease properties for the year ending Q1 2021.
The net-lease sector is attractive to investors because the long-term leases and creditworthy tenants are considered safe attributes during an economic downturn. During the COVID-19 pandemic, the net-lease share of total commercial real estate volume increased to 14.7% in 2020 from 13.5% for full year 2019. The sector exhibited a similar trend during the GFC when its share increased to 15.1% for full year 2009 from 8.7% for full year 2007. For the year ending in Q1 2021, while total net-lease investment volume declined by 25.9% compared with the same period last year as the COVID-19 economic downturn stalled transaction activity, it comprised 15.4% of total commercial real estate investment volume.