Net Lease Sector Showed Strength in the Fourth Quarter of 2020
Outlook for 2021, however, is more uncertain.
January 6, 2021 | Elaine Misonzhnik | Wealth Management Real Estate
While many sectors of commercial real estate continued to struggle in the fourth quarter of 2020, investors’ preference for net lease assets remained strong. Investment sales activity in the sector rose to the highest level in four quarters and average cap rates reached record lows, according to the most recent report from the Boulder Group, a boutique real estate investment services firm specializing in single-tenant net lease properties. At the end of the third quarter, the net lease share of all investment sales activity in the U.S. commercial real estate market reached 18.4 percent, compared to its five-year average of 11.8 percent, reported real estate services firm CBRE.
While the Boulder Group is still estimating the total volume of net lease investment sales that took place in the fourth quarter of last year, it expects that it will be the highest posted in 2020. An estimate made by the net lease brokerage firm Stan Johnson Co. at the beginning of the quarter put the full-year figure at around $50 billion, a drop of about 37 percent compared to the volume of sales closed in 2019, but still more than double the annual volume the net lease sector was able to achieve a decade ago, according to Stan Johnson researchers. The relative strength of activity in the net lease sector was driven by a combination of optimism surrounding the COVID-19 vaccine approvals, the outperformance of tenants involved in e-commerce operations and the record low interest rates.
Those same factors helped drive average asking cap rates lower on net lease assets occupied by retail and industrial tenants, especially as the transactions that did take place involved higher quality properties, according to the Boulder Group report. In the fourth quarter, average asking cap rates dropped by 13 basis points for single-tenant industrial net lease assets, to 6.75 percent, and by 6 basis points for single-tenant retail assets, to 6.00 percent. Average asking cap rates on single-tenant office properties stayed flat, at 6.90 percent. In cases where the properties were occupied by strong credit tenants with long terms remaining on their leases, the cap rates were sometimes far below the average. For example, the sale of an Amazon-occupied industrial facility in Chandler, Ariz. with 12 years remaining on its lease closed at a cap rate of 4.56 percent, the Boulder Group reports. The sale of a 7-Eleven in Riverview, Fla. with 14 years remaining on its lease closed at a cap rate of 4.95 percent.
