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July 6, 2016

Market volatility and new regulatory hurdles as a result of the Protecting Americans from Tax Hikes Act changed the investment dynamic in the net lease sector during 2016’s first quarter. Domestic institutions and cross-border capital emerged as larger players while traditional players such as non-traded REITs saw a pullback in the amount of capital they were able to deploy.

JLL’s Q1 U.S. Investment Outlook shows that institutional investors increased their single-tenant acquisitions by 9 percent year-over-year, focusing much of their capital on the office sector. In fact, the three largest sale leaseback deals of the quarter were all notably large office headquarters: Macy’s in New York for $170 million, CAN headquarters in Chicago for $108 million and Weyerhauser’s headquarters in Seattle for $70.5 million.

Foreign investors remained active in the sector as well, accounting for 9.2 percent of total net lease volume in the first quarter. Although there was a decline from their 17.2 percent of overall net lease activity in the first quarter of 2015, the quarter’s largest transaction still came from abroad.

South Korea-based Korean Investment Management topped the transaction list with its purchase of Cira Square in Philadelphia. The 862,700-square-foot property, leased for the next 14 years by the Internal Revenue Service, sold for $352 million, or $410-per-square-foot. That transaction shows that foreign and domestic investors are seeing secondary markets as a more viable option.

“Private REITs aren’t driving pricing as much anymore, but cap rates are continuing to compress,” said JLL Managing Director Tom Beneville. “The yields that foreign investors and domestic institutions want aren’t as available in primary markets, so they are looking for that reliability in cities like Indianapolis, Philadelphia and Atlanta instead. We predict this shift in buyer type and in market focus will help the sector realize its full-year sales potential.”

Net lease retail product led cap rate compression earlier in the cycle with peak compression of 70 basis points in 2015, but office has since caught up, matching that 70 basis point compression over the past 12 months. Much of that compression is taking place in secondary markets such as Phoenix, San Diego and Fort Lauderdale. Those markets, along with Dallas, led the country in terms of compression in the office sector.

Download JLL’s Q1 U.S. Net Lease Investment Outlook

Tom Beneville
International Director, JLL Capital Markets

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