April 27, 2017

A broad swath of investors continue to target net lease real estate assets despite a complex pricing environment. While commercial real estate overall slipped in the first quarter (down 20.4 percent year-over-year), the net lease sector grew by 14.8 percent. This suggests an investor preference for the performance and risk/reward that net lease assets can provide.

“With the volatility of the fourth quarter behind us, we’re seeing investors become increasingly selective, looking to net lease as a viable long-term investment,” said Brian Shanfeld, JLL Managing Director.

The office sector was the main recipient of the sale increase, seeing the majority of mega deals in the first quarter – seven, to be precise. Several of these mega deals were made by Singaporean investors, which helped push cross border capital flows up 83.9 percent in the net lease sector in the last 12 months compared to the prior 12-month period.

Developers and institutional investors started where they left off in 2016: driving a pretty hot net lease acquisition market. Together, they accounted for 57 percent of the more than $12 billion in net lease transactions in the first quarter. They were joined by public REITs, who had been net sellers in 2016, but who reignited their buying activity to increase purchases by almost 13 percent over the same period last year.

The stabilized sales volumes in the industrial sector are not as remarkable as office, but industrial’s still seen an 8.0 percent increase year-over-year. Increasingly, investors are targeting newer, more innovative industrial warehouses but a lack of that product coming to market has slowed yearly sales volumes.

Retail owners are holding on to their assets for income growth as there are fewer desirable opportunities to reallocate their capital. This limited pool of desirable assets drove retail volumes down by 7.3 percent year-over-year. One potentially positive sign is a tripling in retail sale-leasebacks in the first quarter compared to the same quarter last year. This addition brings a 12-month total that is stable with the prior 12 months of near peak volumes and creates optimism for more sale leaseback opportunities through the year.

While election year uncertainty led to an expected softening of cap rates in all sectors in the fourth quarter, some sectors saw cap rate compression return in the first quarter. Average cap rates for retail net lease sales (5.7 percent) did soften by 35 basis points year-over-year, however. In contrast, average cap rates for office net lease (6.2 percent) and industrial net lease (6.1 percent) compressed in an indication of stronger capital sentiment for those particular sectors.

Could we see an increase of net lease sales in 2017?  It’s possible. With $7.2 billion in net lease office investment sales in the first quarter and increased activity in the sale leaseback pipelines, the sector is on pace for a strong year. Whether it stays on that pace depends on the strength of the deal pipeline through the next three quarters.


Brian Shanfeld

Managing Director, JLL Capital Markets

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