Industrial Sales Driving Net Lease Investment To Record Levels This Year

Prologis Pulaski Distribution Center
Courtesy of Prologis
Prologis' Pulaski Distribution Center Outside Of New York.

Net-leased properties, with their predictable long-term returns at the cost of less upside potential, have proved enticing to investors in this year's economy.

Investment volume of properties that are rented to single tenants on net lease deals in the U.S. rose by 30% in the third quarter to $20.9B, according to the most recent CBRE research report. In 2019 so far, $55B worth of net lease trades have been made, a 24% increase over last year.

Net lease transactions hit a record dollar figure in 2018 overall, but 2019 is well-positioned to beat that figure easily, CBRE reports. Will Pike, the managing director of the real estate services firm's net lease division, estimates that the final figure could exceed $70B, National Real Estate Investor reports.

Industrial properties, namely distribution centers, are the fastest-growing subsection of net-leased properties being sold, increasing by 48% in terms of dollar amount year over year. In Q3, industrial properties grew from 42.7% of all net lease transactions in Q3 2018 to 48.6% in the same period this year, CBRE reports.

The lion's share of net-leased property acquisitions have come from the most deep-pocketed investors, who have the luxury of paying a premium on cap rates in exchange for the security of a building that won't have to be re-leased or significantly renovated for years, Cushman & Wakefield capital markets research head David Bitner told NREI.

Blackstone Group and Prologis have both spent billions this year acquiring industrial properties in massive portfolio deals. Foreign investment has accounted for $6.8B worth of net-lease transactions so far this year, an 18.8% increase from this point last year, CBRE reports.

“[The net lease transaction market] is less driven by market [fundamentals] than by actual credit under the lease,” CBRE's Pike told NREI. "Investors seek reliable cash flow amid uncertainty or when recession is feasible, and so gravitate to this type of investment.”

Predicting the next macroeconomic downturn is little more than a guessing game at this point, but signs of wobbling have been a regular occurrence this year. Multiple types of large investors have already begun pivoting their strategies for long-term safety rather than maximum returns.

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