united states commercial real estate services | cbre - u.s. net … · 2019-05-10 · investing in...

Net-Lease Investment Volume Continues to Rise; Foreign Investors Lead the Charge

April 2018

U.S. NET-LEASE MARKET TRENDS REPORT

Summary

•RisingdemandforU.S.net-leaserealestateledto$57.8billionininvestmentvolumelastyear—thesecond-highestannualtotalsinceCBREbegantrackingthemarketin2002.Investmentvolumein2018isexpectedtobecomparable,withincreasinginvestorappetitefornet-leaseofficeandindustrialassets.

•Overallnet-leasecapratessoftenedslightlylastyear,thoughcertainassetclassessawcontinuedcompression.Spreadsremainedessentiallyunchangedfrom2016andwereinlinewithlong-termaveragesatabout400basispoints(bps).Thisbuffershouldbesufficienttomaintainattractivemarginsin2018,asnet-leasecapratesareexpectedtostabilize.

•TheglobalsearchforyieldandapushforportfoliodiversificationaredrivingforeigninvestorstotheU.S.net-leasemarket.Overthepastfouryears,foreigninvestorsincreasedtheirholdingsofnet-leasepropertiesmorethananyotherinvestorgroup.Canada,SouthKoreaandChinahavebeenthetopbuyers.

CBRE Research © 2018 CBRE, Inc. | 2

April 2018U.S. NET-LEASE MARKET TRENDS REPORT

U.S. net-lease transaction volume—comprising office, industrial and retail properties—totaled $57.8 billion in 2017, up by 3.3% from 2016. Net-lease volume accounted for a greater share (21.6%) of overall investment activity in 2017, a share that has generally trended higher since 2014. The marked upward shift in the average share of net-lease transactions relative to total investment following the Great Recession is an indication of strong investor demand for this relatively low-risk option.

Net-lease volume continues to rise; new gains from industrial sector

Net-Lease Market Overview

Source: Real Capital Analytics, Q1 2018.

10.013.6

19.6

28.5

36.840.9

19.2

11.7

19.325.4

34.6

47.351.8

64.2

56.0 57.8

0%

5%

10%

15%

20%

25%

30%

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

$ Billions

Figure 1: U.S. Net-Lease Sales Volume

Net-Lease Office Volume (L) Net-Lease Industrial Volume (L) Net-Lease Retail Volume (L) Net-Lease Share of Overall Volume (R)

The industrial sector drove gains in overall net-lease volume in 2017, expanding by 12.5% year-over-year. This growing interest in industrial product was highlighted in CBRE’s Americas Investor Intentions Survey 2018. According to the report, a full 50% of investors stated that industrial was their preferred sector for investment this year, which suggests that net-lease industrial volume will continue to strengthen in 2018.

https://www.cbre.com/report-download?PUBID=ffff776f-daba-4f97-add5-8de038515af3

https://www.cbre.com/report-download?PUBID=ffff776f-daba-4f97-add5-8de038515af3



Net-lease retail volume remained stable year-over-year in 2017, while net-lease office volume fell modestly (-2.2%)—the first annual decrease since 2011. This decline in net-lease office volume is largely attributable to a relative lack of opportunities in gateway markets, where both prices and competition for assets are higher, rather than a pronounced drop in net-lease office demand. This conclusion is supported by heightened transaction activity in high-growth secondary and tertiary markets with available opportunities. Indeed, while the dollar volume of net-lease office transactions dipped in 2017, the actual number of net-lease office assets that traded increased by 4.2% from 2016.


Figure 2: 2017 Net-Lease Volume Breakdown by Property Type

Net-Lease Retail Volume

Net-Lease Office Volume Net-Lease Industrial Volume

39%

35%

26%


U.S. NET-LEASE MARKET TRENDS REPORT April 2018

Figure 3: Yield Comparison Table

Source: CBRE Research, Bloomberg, Commercial Mortgage Alert, Real Capital Analytics, Q1 2018.

Investment Vehicle Yield

10-Yr Treasury Multiple

German 10-Year Treasury 0.50% 0.2x Japanese 10-Year Treasury 0.05% 0.0xU.S. 10-Year Treasury 2.74% -Investment-Grade Bonds 3.60% 1.3xHigh-Yield Bonds 6.20% 2.3xBBB CMBS 5.99% 2.2xClass A Core Real Estate (unlevered) 4.70% 1.7x

Single-Tenant Cap RatesIndustrial 6.5% ~2.5xOffice 6.7% ~2.5xRetail 6.4% ~2.5x

Attractive risk-return profile draws investors

Figure 4: Effective Bond Yields vs. Net-Lease Cap Rates

Source: Bank of America Merrill Lynch, Federal Reserve, Real Capital Analytics, Q1 2018.

0246810121416

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% High-Yield Bond (BB) Investment-Grade Bond (AAA) 10-Year UST Average Net-Lease Cap Rate

The search for yield remains the key driver for investing in U.S. commercial real estate, though asset-class diversification is also an increasingly important motivation.1 Net-lease assets are well-positioned to satisfy both yield and diversification requirements, as well as offer a relatively low-risk investment option.

Recent trends in the U.S. corporate bond market provide one illustration of the potential opportunities in the net-lease sector relative to other investment vehicles. A sustained low interest rate environment and a global search for yield have fueled corporate bond issuance to new record highs for the past six years. Bond yields are now near all-time lows, and the risk premium has narrowed significantly. Although future interest rate hikes are expected to be modest, particularly given low inflation, the narrow spread between corporate bond yields and Treasury rates provides little cushion for investors, especially those with long-dated bonds.

Like bonds, net-lease assets provide similar long-term, passive, periodic cash flows. The net-lease market presents an alternative to investors utilizing this strategy, but who are

concerned about balancing risk with sufficient returns—an opportunity to diversify a portion of their portfolios. Moreover, net-lease properties deliver a significant yield spread when compared with other asset classes. Only high-yield corporate bonds come close to matching the average yields available in the net-lease sector, but net-lease cap rates exhibit far less volatility, particularly during economic downturns.

1 CBRE Americas Investor Intentions Survey 2018.

2002 20102006 20142004 20122008 20162003 20112007 20152005 20132009 2017



After trending modestly downward or holding steady through most of the year, cap rates for all three net-lease property types expanded in Q4 2017. As a result, on average, overall net-lease cap rates were slightly higher last year than in 2016. Net-lease retail and office cap rates increased by 21 bps and 11 bps, respectively, while net-lease industrial cap rates decreased by 8 bps last year.

Driven in part by rising investor demand for net-lease industrial assets, cap rates are grouped much more tightly than at any other time over the past 15 years. As of Q4 2017, the spread between

net-lease retail and industrial cap rates—historically the property types with the greatest disparity—was just 14 bps, compared to an average spread of 73 bps since 2002.

Net-lease cap rates are expected to stabilize this year, with the spread over the 10-year Treasury remaining healthy. Even as Treasury rates have ticked higher, the average year-end spread of approximately 400 bps last year is on par with year-end 2016 and should provide sufficient runway for further increases in interest rates in 2018.

Spreads steady despite slight cap rate expansion

10-Year UST Net-Lease Office Cap Rate Net-Lease Industrial Cap Rate Net-Lease Retail Cap Rate Average Net-Lease Cap Rate

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Max. Spread: 578

Min. Spread: 184

Current Spread: 417

Figure 5: Cap Rate Spreads

Source: Real Capital Analytics, Federal Reserve Bank, Q1 2018.



Cross-border investors increase appetite for net-lease properties

Net-Lease Foreign Investment Spotlight

Foreign investors have increased their holdings of U.S. net-lease properties more than any other investor group over the past four years, adding a net balance of nearly $10 billion in net-lease properties to their books since 2014.2 This is 65% more net investment than that of private equity investors over the same period, despite significantly lower gross acquisition activity, since private investors tend to sell far more of their net-lease assets than do cross-border investors.

Although gross cross-border acquisitions activity is historically lower when compared to other buyer groups, many foreign investors have substantially increased their capital investment in net-lease properties over the past two years. This increased investment has made cross-border investors stand out as a potential opportunity in today’s capital market environment with a “late-inning” feel to it.

2 This is limited to individual-asset sales (excluding entity-level transactions), which are the most accurate indicator of investment momentum.

Note: Excludes entity-level transactions.Source: Real Capital Analytics, Q1 2018.

Figure 6: Net-Lease Net Acquisitions by Investor Group, 2007 to 2017

$ Billions

-5-4-3-2-10123456

Cross-Border Inst' l/Eq Fund Listed/REITs Private User/otherInstitutional/ Equity Fund

User/Other



Cross-border investment in U.S. net-lease properties has skyrocketed to $6 billion annually over the past three years from $2.1 billion annually between 2003 and 2014, increasing foreign investors’ share of the net-lease market to

more than 11% from 8%. Foreign investors clearly are diversifying their portfolios with U.S. net-lease properties due to a persistent lack of yield opportunities abroad, and their increased market share could signal the start of a longer-term upward trend.


Figure 7: Cross-Border Net-Lease Investment

Cross-Border Net-Lease Investment (L) Share of Total Net-Lease Investment (R)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0

1

2

3

4

5

6

7

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

$ Billions



The top countries for foreign investment in U.S. net-lease properties are Canada, South Korea and China. From 2015 to 2017, these three countries accounted for nearly half of all foreign investment in the U.S. net-lease market. Canadian and Chinese capital was primarily concentrated on industrial properties, while South Korean investors overwhelmingly preferred office product.

None of the top-10 countries investing in the U.S. net-lease market over the past three years have made significant purchases in the retail sector. However, other countries that did invest heavily in net-lease retail did so almost exclusively. The top-three foreign buyers of net-lease retail (Spain, France and Australia) have invested a combined $1.2 billion in the U.S. net-lease market since

2015, with 90% of this total devoted to retail properties. These countries accounted for 46% of all cross-border retail net-lease investment during this period.

Investment in office and industrial properties was even more concentrated. South Korea, Germany and Singapore collectively invested $5.8 billion in net-lease office properties between 2015 and 2017, accounting for half of the total foreign investment in U.S. net-lease office product. Industrial investment was even more top-heavy during this period: the $5.4 billion invested by Canada, China and the United Arab Emirates represented 72% of total foreign investment in U.S. net-lease industrial product.

Canada and South Korea lead foreign countries for U.S. net-lease investment, but prefer different property types


Figure 8: Cross-Border Net-Lease Investment by Country of Origin, 2015 to 2017

Office Industrial Retail0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Canada

South Korea

China

Singapore

Germany

United A rab Emirates

United Kingdom

Switzerland

Kuwait

Japan

$ Billions



CBRE is a top brokerage of net-lease properties, closing nearly one-fifth of overall U.S. net-lease transaction volume in 2017, including the single largest net-lease deal of the year.3

The analysis presented below is based on a sample of $4 billion in CBRE-brokered investment sales of net-lease properties and portfolios in 2017. The average cap rate for the CBRE sample was 6.47%. Cap rates ranged from the low-3% range to around 10%, reflecting investor appetite for deals across many price points, though the majority (82%) of cap rates in the sample ranged from 5% to 7%.

Cap rates declined for all net-lease retail store types last year when compared to CBRE-brokered net-lease deals in 2016 (net-lease industrial and office assets were not included in last year’s

sample for comparison). Grocery stores saw the strongest compression, with the average cap rate falling by more than a full percentage point to 5.84%. This divergence in the cap rate trend from the U.S. net-lease market as a whole indicates that, given the right financing structure, deals are still being executed at aggressive price points.

The remaining length of lease term at the date of purchase has a marked effect on cap rates, as longer leases represent less risk. The average cap rate for properties with more than 10 remaining years was 149 bps lower than the average for properties with less than five years. Relative to last year’s CBRE-brokered sample, cap rates have compressed for deals in all time brackets, revealing strong investor demand across the board.

Analysis of CBRE-brokered net-lease investment

Note: Office and Industrial cap rates were not included in the 2016 sampleSource: CBRE Research, CBRE Net-Lease Property Group, Q1 2018.

Figure 9: Net-Lease Retail Cap Rates by Store Type

2016 2017

3 Real Capital Analytics, 2017.

6.48 6.536.91

6.08 6.19

7.35 7.25

6.15

7.18 7.066.446.42

5.966.44

5.71 5.65

6.78 7.03

5.39

6.545.84 6.17

0

1

2

3

4

5

6

7

8

Auto Bank Big-Box Casual Dining ConvenienceStore

DiscountStore

Drug Store Fast Food General Retail Grocery Health Care

%



On average, fast-food properties had the longest leases (14.6 years). Investor demand for these assets is strong, since in addition to longer leases, fast-food properties often have corporate-backed tenants with good credit. Reflecting this demand, fast-food properties had the lowest average cap rate of all product types (5.39%) and were also the most expensive per square foot ($674).

Because office properties are so much more expensive than industrial and retail, total dollar volume was highest in the office segment. However, on a per-sq.-ft. basis, net-lease office properties offer considerable value relative to most net-lease retail product types, although net-lease industrial properties are the biggest bargain.

Source: CBRE Research, CBRE Net-Lease Property Group, Q1 2018.

Store TypeAvg.

Cap RateAvg. Size (Sq. Ft.)

Avg. Close Price ($Mil)

Avg. Price PSF

Total Sales Vol ($Mil)

Total Assets Sold

Auto 6.42 6,752 2.1 309 104.4 50

Bank 5.96 5,908 2.9 489 239.6 83

Big-Box 6.44 46,786 7.7 164 238.2 31

Casual Dining 5.71 6,932 3.3 477 195.2 59

Convenience Store 5.65 5,797 1.8 309 111.2 62

Discount Store 6.78 10,306 1.6 153 56.9 36

Drug Store 7.03 12,698 4.7 370 272.2 58

Fast Food 5.39 3,512 2.4 674 80.5 34

General Retail 6.54 25,267 3.8 150 60.7 16

Grocery 5.84 51,195 21.6 422 172.7 8

Health Care 6.17 6,696 3.4 507 20.4 6

Industrial 7.22 234,222 15.5 66 418.0 27

Office 6.40 236,163 55.1 233 1,981.8 36

Other 7.23 57,643 7.1 123 78.2 11

Total/Average 6.47 36,142 7.6 211 4,029.9 517

Figure 11: Sample Statistics, CBRE-Brokered Net-Lease Deals in 2017

Figure 10: Average Cap Rate by Time Remaining on Lease

Source: CBRE Research, CBRE Net-Lease Property Group, Q1 2018.

7.26%6.62%

5.77%

0%

1%

2%

3%

4%

5%

6%

7%

8%

<5 Years 5-10 Years >10 Years



Demand remains healthy as investment and yield stabilizeOutlook for 2018

Investor interest in the net-lease sector is expected to remain strong in 2018, as capital availability—particularly from institutions—remains high. After showing increased interest last year, private equity firms and hedge funds are expected to increase investment as they transition from “window shoppers” to buyers. Cross-border investors will maintain their portfolio diversification efforts and increase their net acquisitions volume in 2018.

Corporate office trades will likely increase, as many institutional buyers remain focused on net-lease office product in core markets. Industrial and health-care deals will account for a growing share of the total net-lease market, as key trends in these sectors (i.e., the expansion of e-commerce and an aging population) drive heightened demand.

Total investment volume is anticipated to either match or fall slightly short of 2017’s level. Available capital remains abundant, and debt markets are expected to play a larger role. Single-borrower securitizations increased last year, contributing to outsized returns, and this trend is likely to continue in 2018.

Cap rates for net-lease properties are expected to stabilize this year. Further compression is not expected, which should help maintain a healthy spread between average yield and the 10-year Treasury. Despite the threat of rising interest rates, current spreads provide a good buffer to help maintain attractive margins. The current spread of 417 bps represents more than double the gap at the height of the pre-recession market in 2006 and 2007.

Source: Real Capital Analytics, Federal Reserve Bank, Q1 2018.

Figure 12: Spread Between Net-Lease Cap Rates and the 10-Year Treasury

0

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

BPS

2002 20102006 20142004 20122008 20162003 20112007 20152005 20132009 2017



Figure 13: Top-10 Net-Lease Transactions, 2017

Note: Includes only true sales and excludes transactions for redevelopment. Source: CBRE Research, Real Capital Analytics, Q1 2018.

Date Property NameProperty

Type City State Sq. Ft. Price ($Mil)

Price PSF Buyer Seller

Q3 2017 Oak Street Net-Lease Portfolio Mixed Various Various 6,800,000 1,300 192 Stonemont Financial Oak Street

Q1 2017 60 Wall Street Office New York NY 1,612,000 1,040 645 GIC Real Estate Confidential

Q2 2017 ElmTree US Industrial/ Office Portfolio

Office/Industrial Various Various 5,800,000 950 164 ChinaLife ElmTree Funds

Q4 2017 State Farm @ Marina Heights Office Tempe AZ 2,118,000 928 438 JDM Partners,

Transwestern State Farm

Q3 2017 Campus @ 3333 (Phase 3) Office Santa Clara CA 940,000 610 649 CBRE Global Investors,

Korea Post, CalSTRSMenlo Equities, Beacon Capital Partners

Q3 2017 222 Second Street Office San Francisco CA 452,418 530 1,171 Tishman Speyer Confidential

Q2 2017 Midtown 21 Office Seattle WA 373,000 330 885 Union Investment Real Estate GmbH MetLife, Trammell Crow

Q1 2017 211 Main Street Office San Francisco CA 417,266 313 750 Blackstone CIM Group

Q4 2017 Dreamworks Animation HQ Office Glendale CA 459,770 292 635 Ocean West, Hana

Asset Mgt Griffin Capital

Q1 2017 Sunnyvale Portfolio Office Sunnyvale CA 349,758 291 831 TriStar Capital Rockwood Capital

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.


Will Pike Managing Director Corporate Capital Markets +1 404 923 1381 [email protected]

Guy Ponticiello Managing Director Corporate Capital Markets +1 312 861 7814 [email protected]

Spencer G. Levy Head of Research and Senior Economic Advisor, Americas +1 617 912 5236 [email protected] Twitter: @SpencerGLevy

Lisa DeNight Senior Research Analyst +1 215 561 8932 [email protected]

Travis Deese Senior Research Analyst +1 404 812 5012 [email protected]

Taylor Jacoby Senior Research Analyst + 1 415 772 0297 [email protected]

To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway.

Additional U.S. Research from CBRE can be found here.

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united states commercial real estate services | cbre - u.s. net … · 2019-05-10 · investing in...

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