Driven by unprecedented demand for single-tenant assets, 2021 marked a record for net lease transaction volume, which totaled $79.3 billion and was up 39 percent over 2019 levels.
Senior managing director Alex Sharrin, based in JLL’s Miami office and is part of the firm’s Capital Markets net lease team that focuses on private capital, anticipates that trend to continue, led by Sunbelt markets.
“Liquidity for net lease assets has reached historic highs in recent months,” said Sharrin. “Rising acquisition targets and mandates from traditional net-lease investors, coupled with new private and institutional capital entering the space, is expected to support continued momentum looking ahead to 2022.”
An Abundance of Capital
The net lease sector’s momentum is indeed carrying into 2022, agrees Robert Poirier, associate vice president at Northmarq.
“With an abundance of capital from a wide range of investors chasing net lease opportunities, we expect this to continue at least through the third quarter of the year,” he tells GlobeSt.com. “The Sunbelt states have certainly benefited from the politics and policies surrounding the COVID pandemic as investors have aggressively focused their attention on assets located within that region being that mandates were less stringent than in some of the other areas of the country.”
Industrial, Retail and Office See Boosts
The property sectors currently experiencing a boost in liquidity by net-lease demand include industrial, retail and office. With a 75-percent increase over 2019, industrial leads the pack with $37.3 billion in transactions. Even though e-commerce leasing remains strong, logistics was the driving force for demand in 2021, which is expected to continue throughout 2022.
Related CRE trends are influencing this growth, Chester P. Lee, co-chair of Duane Morris’ Real Estate Practice Group, tells GlobeSt.com. “The strength of the multifamily sector, particularly in the Sunbelt, has resulted in heightened demand in those states for retail and logistics/warehouse. And last mile logistics gained tremendous traction during the retail shut downs of the pandemic with many large retailers seeking points of distribution closer to population centers.”
Net leased retail volume totaled $18.3 billion in 2021, up 65 percent over 2019, driven by significant private capital activity. The sector saw a sharp recovery in occupier demand in the second half of 2021 and was particularly strong in Sunbelt markets, which is also true for the office sector.
Quick Service Retail, in particular, has been booming especially in the Sunbelt states, Christopher E. Maling, principal-retail capital markets, Avison Young, tells GlobeSt.com.
“The demand has outpaced supply for such tenants as Chick-fil-A, Chipotle, KFC, Taco Bell and various burger establishments,” Maling said. “Investors are moving capital out of management-intensive assets such as office or apartment assets due to pandemic stress, as these sectors have been hit with state and local agencies granting tenants the opportunity to not pay rent.
“Investors are attracted to income tax-free states such as Texas, Tennessee and Florida, and many are actually looking to move their residency as well. The QSR sector has not only been resilient in the pandemic, but accelerated sales growth and redefined its position in the marketplace with additional drive-thrus and limited indoor seating. It is the dominant class in retail net lease.”
Population Growth Spurs Activity
While net-lease demand and historic liquidity is a national trend, Sharrin believes Florida is positioned perfectly to capitalize on this trend. Florida, and, specifically South Florida, has benefited from recent population migration trends to the state, resulting in demand for multi-housing, industrial, retail and office space.
Companies such as Elliott, Starwood and Icahn Enterprises all recently relocated to the Miami area, which JLL Research identified as one of the more stable markets for net-leased office occupancy levels.
Sarah McKevitt, Senior Manager, Real Estate Senior Analyst with RSM US, tells GlobeSt.com that the Sunbelt states have been the beneficiaries of population growth and related business growth throughout the pandemic.
Data from CoStar shows population growth of 2% on average in the Sunbelt states since the fourth quarter of 2019. For comparison, population growth in the larger metros of Chicago, New York, San Francisco and Boston was 0% over the same period. Median household incomes in Sunbelt states have been increasing at a faster percentage since the pandemic onset, with a median income average increase of 4.6%.
“Growth in population and median income for the Sunbelt states has translated into business growth,” McKevitt said. “Businesses are chasing talent and customers as they look strategically at the future.
“The Sunbelt office sector has been a bright spot for the sector as a whole, while the traditional gateway office buildings struggle for growth.”
This is evidenced by building deliveries, according to CoStar data. In Sunbelt states, gross office building deliveries were on average of 59 buildings per year from 2012-2019, but since 2019 that average has been approximately 69 buildings per year.
“The traditional gateway markets have experienced an overall decrease in average building deliveries,” she said. “The supply of workers and money into Sunbelt states is causing a demand for more office space, thereby making Sunbelt offices a bright spot as the future of the office sector unfolds.”
1031 Tax-Deferred Exchanges Coming From Northeast
The flight of capital into Florida and the Sunbelt states is not a new phenomenon, Patrick Nutt, executive vice president, NNLG/Market Leader, South Florida, SRS National Net Lease Group, tells GlobeSt.com.
“The catalyst of Covid expedited the population shift to the state, and investment dollars followed. Compounding that was the wave of 1031 tax-deferred exchanges largely coming from the northeast, and motivated by the threat of tax policy changes from the Biden administration.
“Those dollars have been focused on areas with favorable macroeconomic and pro-growth trends, namely Florida and Texas.”
Another reason for the Sunbelt’s allure is that the strength of these markets allows investors to often underwrite projected rental rate growth based in part on inward migration, which bodes well for eventual renewal or re-tenancy, says Eli Randel, CREXi Chief Strategy Officer. “As gluts of capital continue to seek safe and passive yield, net lease in strong markets like the Sunbelt remain very attractive,” he tells GlobeSt.com.
Nutt also notes that an interesting change in these competitive markets is the upward mobility of private high net worth investors.
“A single asset sale in excess of $20 million or a portfolio of $50 million was typically marketed and sold to institutional investors, however, in the past 24 months the number of private buyers participating in 1031 exchanges with $20 million-plus to reinvest has grown exponentially.”
Approximately 20 percent of the $3.5 billion capital markets transactions for SRS in 2021 came from 1031 investors with individual exchanges exceeding $20 million, according to Nutt.
Hard Assets a Benefit in Inflationary Environment
The current inflationary environment is also giving net lease a boost, says Eric Rothman, CFA, portfolio manager, Listed Real Estate, CenterSquare Investment Management.
“Commercial real estate subject to a net lease structure is especially attractive to investors for a number of reasons including higher initial yields relative to other property types, the more granular nature of the investments, the pass-through nature of operating expenses, landlord freedom from operational commitment, the high-quality nature of the tenants, and the higher component of land-value to building value,” Rothman tells GlobeSt.com.
“In fact, W.P. Carey announced intentions to acquire an affiliated private REIT, Corporate Property Associates 18 – Global Incorporated (“CPA 18”), in a $2.7B deal. Despite rising interest rates in the immediate term, the net lease REITs’ investment spreads remain healthy and they can generate positive earnings growth (AFFO/sh) through acquisitions.”
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