Net-Lease Investment Gobbles Bigger Share of U.S. Commercial R.E. Market

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Commercial real estate properties that are net-leased are a bigger share of the U.S market than ever before.

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In fact, 20.2 percent of total commercial real estate investment in the second quarter of 2020 was in properties that are net-leased, a lease structure where the tenant pays at least a portion of all of the taxes, insurance and maintenance costs on a property in addition to the rent for it, according to a new report from CBRE.

The same situation—a flight to such setups, which usually signals a super-reliable tenant and relatively little responsibility on the ownership side—was last seen during the financial crisis of 2008 and 2009. The share reached 14.9 percent then. The coronavirus pandemic, of course, has brought on the current situation.

“Similar to the [financial crisis] 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,” Will Pike, vice chairman of net lease properties for CBRE’s capital markets practice, said in a release on the report. “We are seeing an uptick in capital requests for long-term net-lease assets and sale-leaseback financing opportunities.”

The trend is going to continue, too.

“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,” Pike said.

The second quarter share of 20.2 percent was up from 13.3 percent during the first quarter, which ended about two weeks before the World Health Organization declared the coronavirus a pandemic. Interestingly, the record share came even as net-lease investment fell some 61.8 percent annually in the second quarter, to $8.1 billion, according to CBRE. It’s just that total investment in commercial real estate tumbled even further: 69.9 percent annually.

Chicago, Philadelphia, Los Angeles, California’s Inland Empire and Dallas-Fort Worth saw the most net-leased volume in the second quarter. And the industrial sector—which has been especially hot in general amid a boom in e-commerce during the pandemic—saw its total share of net-lease investment increase to 48 percent during the second quarter from 43.8 percent in the first, due almost entirely to a decline in the shares of the office and retail sectors (which have not been so hot).