Net lease arrangements are familiar territory to pretty much every segment of commercial real estate (CRE) investment, but the pandemic put many operators -- including real estate investment trusts (REITs) -- into a new, unfamiliar, and downright troubling place.Net leases call for the tenant to pay for such items as maintenance, taxes, and insurance -- and can carry the triple net lease (NNN) label when it's all three. And then there's the rent. Collections and occupancy fell sharply for many as businesses came to a sudden halt, slamming retail doors shut and sending workers home from the office to work instead in home offices.
But the vaccine rollout has stemmed that tide, and a major CRE management and investment player is reporting that net-lease investing has already recovered to nearly pre-pandemic levels.
"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," said a June 2 research report from CBRE (NYSE: CBRE).
Net leasing activity rose while overall CRE volume fell; office activity set volume record
The CBRE researchers found that while investment volume in CRE overall fell 18.3% year over year from Q120 -- as the pandemic's effects were first being felt -- to Q121, it only fell 2.6% in that same period to $14.3 billion. And the volume was actually up 10% from Q119, just before COVID-19 rolled across the United States.
Lending more evidence to the argument that office space may be staging a comeback, the CBRE report said the office sector's share of total net-lease investment volume jumped 5.2 percentage points year over year to 41.5%. Plus, it set a new record for first-quarter volume at almost $6 billion, CBRE said.
The retail segment, meanwhile, saw its share fall by 5.4 percentage points to 15.1%. Industrial space continued to lead in market share for new net-lease capital at 43.4%, which CBRE said was relatively unchanged from Q120 to Q121.
REIT investment volume plunged year over year
The CBRE analysis found that net-lease investment volume by REITs overall plunged by 44% year over year in the first quarter. That perhaps reflects a retreat from troubled office and retail trusts that saw their share prices plunge, and in some cases dividends reduced or eliminated, during the peak of the pandemic.
The report said the largest net-lease buyers in the first quarter were institutional and equity funds, which grew their acquisition commitment by 40% in a year to $6.7 billion. CBRE said private investment in net-lease properties grew by 6.7% over the same period to $6.3 billion.
Gateway cities beginning to gallop; foreign money arrives even if visitors don't
Boston drew the most new net-lease capital in the first quarter, CBRE said, as San Francisco, Los Angeles, New York City, and Richmond, Virginia, also led the way as gateway cities dominated the growth overall, CBRE said.
"Net-lease investors are also increasingly attracted to high-growth secondary and tertiary markets, with some of the largest four-quarter percentage gains occurring in Provo, Utah (+639.4%); Trenton, New Jersey (+609.8%); Savannah, Georgia (+451.5%); and Honolulu, Hawaii (+258.7%)," the report said.
CBRE also found that while COVID-19 kept people from other lands away physically, their money made it here. Foreign investment volume grew 8.7% from Q120 to Q121, the report found, with three-fourths of that capital coming from just four countries: Canada, Kuwait, Singapore, and South Korea.
The Millionacres bottom line
"Much like the global financial crisis 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," Will Pike, vice chairman of net lease properties for CBRE, said in the report.
That sounds like the same reason investors are seeking out REITs to plunk money into as the market recovers. Each sector and company will be responding in its own way as a new normal emerges, but savvy buyers should be able to find some good things to hold onto.