Offering a combination of steady income and hands-off management, net lease properties accounted for 20.2% of total commercial sales in the second quarter, compared with 13.3% the previous quarter, according to research from CBRE Group Inc.
The L.A. market ranked No. 3 in the nation for total net lease investment volume during the second quarter, CBRE said.
Driving that gain was the industrial sector, which saw net lease investment increase to 48% while activity in the office and retail areas decreased.
Peter Belisle, market leader for Jones Lang LaSalle Inc., said single-tenant lease properties are “always desirable during a recession.”
In net lease assets, tenants still sign a lease. But unlike with traditional leases where owners still handle associated costs and property issues, tenants cover costs and maintenance.
There can be some variation in how these agreements are structured, but the tenant can be responsible for everything from replacement roofs to property taxes.
“We are seeing quite a bit of demand for those assets,” said Pat Weibel, a director at the Stan Johnson Co. “Going into the shutdown we were unsure of how things would play out but have been pleasantly surprised with the continued demand for the net leased assets.”
Other brokers have had similar experiences.
“When you’re looking at overall all the asset classes for the investor pool to select from — whether it’s hospitality, retail, office, industrial — the net lease sector … has been the investment class of choice. The reason for that is you have the security of an income stream with a tenant that is offering a daily need or a Covid-compliant-type essential business,” said Chris Maling, a principal with Avison Young Inc.
Newmark Knight Frank Executive Managing Director Matt Berres added that “single-
tenant properties with triple-net leases have increased in popularity due to the risk-adjusted returns compared with other asset types.”
Weibel said net lease assets can also be attractive to investors because they have been more reliable at a time when bond market yields are low and the stock market has been unpredictable.
“Investors for net leased product are looking for a safe haven,” Weibel said.
Single-tenant net lease assets represent a hands-off opportunity for owners, who can sit back and wait on rent checks.
Maling said many investors start with multifamily, then move to multitenant centers before seeking something less management heavy, such as a net lease property. Some are even willing to take a reduced yield in return for fewer management obligations.
Maling added that some individuals take this route as a form of estate planning, to avoid leaving their beneficiaries with lots of management work.
Stephen Stein, managing partner at Tauro Capital Advisors Inc., said the company, which sources debt and equity, has seen a lot of interest in net lease assets.
Matt Bucaro, a senior director at Tauro Capital Advisors, added that “single-tenant
triple-net properties this year are on fire.”
People are especially interested in buildings housing essential businesses, Bucaro said, although he added that office properties have not done as well.
But single-tenant net lease properties may be difficult to purchase.
CBRE Executive Vice President Anthony DeLorenzo called it the most “in demand” product, adding that it has been really hard to find properties as buyer appetite has increased.
DeLorenzo said many net lease property buyers were 1031 exchange investors, which allow sellers to avoid paying capital gains taxes by reinvesting sale proceeds in a specific time period, or by doing a reverse change where a property is purchased and another is sold.
There are several reasons industrial is setting the pace with net lease properties.
“People have chased single tenants and product types that are more resilient. Industrial is the benefit of both,” DeLorenzo said.
Berres added that industrial properties have “been the clear beneficiary of the pandemic, and that should continue for the foreseeable future.”
Weibel said the big reason industrial real estate was doing so well was stability.
A Torrance building under renovation that will be used by Amazon recently sold for $81 million, one year after it was sold for $41.3 million. The site was formerly a Costco Wholesale Corp. store.
While shopping centers may be struggling, some types of retail real estate assets are in high demand, especially grocery stores, drug stores and properties with drive-through capabilities.
Most experts think interest in net lease properties will continue.
NKF’s Berres said the fourth quarter could be the strongest of the year.
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Article by Hannah Madans @ Los Angeles Business Journal