U.S. net-lease investment in 2019 is on pace to surpass last year’s record level, with Phoenix among the leading target markets for investors, according to the latest research from CBRE.
Phoenix was among the top-5 markets for net-lease investment in Q3 2019 with total volume of $863 million—up 39.2% year-over-year. For the year-ending Q3 2019, net-lease investment in Phoenix totaled $1.77 billion——up 8.9% year-over-year.
“Investor demand for single-tenant net-lease assets in Arizona and nationally continues to grow exponentially,” said Joe Compagno, senior vice president of CBRE’s Net Lease Property Group Phoenix. “In an environment where yield is scarce among other asset classes, investors are competing for real estate properties with long-term leases to publicly traded companies that offer a more compelling risk-adjusted rate of return.”
The Inland Empire (Southern California) and Portland topped the ranking for year-over-year investment volume growth in Q3 2019. Investors are increasingly focused on net-lease investment opportunities in high-growth secondary markets such as San Jose, Orange County and San Diego, with these markets seeing strong investment volume growth year-over-year. Los Angeles and Miami had the largest year-over-year gains for gateway markets.
Total net-lease investment in the U.S.—comprising office, industrial and retail properties—increased by 30.2% year-over-year to $20.9 billion in Q3 2019, the third-highest quarterly total on record. Investment volume in Q3 2019 was driven by a 48.5% year-over-year gain for the industrial sector and a 22.1% gain for the office sector, with the retail sector increasing by 8.8%.
Net-lease investment volume year-to-date through Q3 2019 climbed 24% year-over-year to $55.2 billion and outpaced the broader commercial real estate market. The net-lease share of total commercial real estate investment stood at 14.6% in Q3 2019, one of the highest quarterly shares of this cycle and higher than the 11%-to-13% range held since 2012. This suggests sustained investor demand for net-lease assets that will see full-year volume surpass 2018’s record total of $69.6 billion.
Cross-Border Net-Lease Investment
The global search for yield and portfolio diversification is attracting international investors to the U.S. net-lease market. Cross-border capital for net-lease properties reached $6.8 billion year-to-date through Q3 2019—up 18.8% from the same period last year.
Foreign buyers accounted for just 4.7% of net-lease investment volume in Q3 2019, compared with their 18.8% share in Q2 2019. Miami, Dallas/Ft. Worth, Los Angeles, San Francisco, and Charlotte received the most foreign capital for net-lease investment in Q3 2019. Over the past two years, the top countries for inbound capital are Canada, Germany and Singapore.
Foreign investment in U.S. net-lease properties has averaged more than $8 billion annually over the past four years from $3.1 billion annually between 2011 and 2014.