Net-lease investment volume, using single-tenant asset transactions as a proxy, fell by 2.6% year-over-year to $14.3 billion in Q1 2021, according to CBRE.
Compared to pre-pandemic numbers in Q1 2019, volume rose 10%. The average net-lease cap rate remained flat at 6.2%. However, 10-year Treasury yields jumped in Q1 2021. That caused the spreads between the average net-lease cap rate to tighten to 449 basis points by the end of the quarter.
For commercial real estate, volume was down 18.3% in Q1 2021, according to Real Capital Analytics.
For the year ending Q1 2021, which covered the pandemic, volume fell 25.9% to $60.5 billion compared to the same period a year earlier. Citing data from Real Capital Analytics, CBRE says net lease comprises 15.4% of total commercial real estate investment volume.
The net lease share of all investment activity rose to 14.7% in 2020. In 2009, during the Great Recession, it reached 15.1%.
“Net-lease investments provide attractive risk-adjusted returns from long-term leases with creditworthy tenants,” according to CBRE. “These returns are particularly appealing in times of uncertainty.”
Net lease office properties took a larger share of volume, which increased 5.3 percentage points over the past 12 months to 41.5%. While the industrial sector’s share stayed flat at 43.4%, retail’s share dropped by 5.4 percentage points to 15.1%.
Net-lease industrial and retail cap rates stayed flat, at 6.0% and 6.2% from Q4 2020., respectively. In office, cap rates rose by 10 basis points to 6.5%, according to CBRE.
Boston led the way in net lease investment in Q1. It was followed by San Jose, The East Bay, Philadelphia, Los Angeles, Seattle, Richmond, Phoenix, Houston, and Minneapolis.
There was some change in the buyer mix in Q1. While REIT net-lease investment volume fell 44% year-over-year in Q1 to $1.4 billion, institutional and equity funds increased by 40% year-over-year to $6.7 billion to become the largest buyer group in the quarter. In Q1, private investment and foreign investment in net-lease properties grew 6.7% year-over-year to $6.3 billion and 8.7% to $1.7 billion, respectively.
The Q1 international share of net lease volume at 11.6% was slightly above their five-year Q1 average of 11.1%. For the year ending Q1 2021, global investment in U.S. net-lease properties dropped 29.2% from the same period last year to $6.5 billion. Those investors favored San Francisco, Richmond, Boston, Los Angeles, and New York City in Q1 2021.
Of course, there has been a wide discrepancy in net lease performance during the pandemic. While essential retailers, like groceries and pharmacies, performed well, other segments, like casual dining, have struggled. That showed up in Q1 performance.
In the first quarter, national asking cap rates in the single-tenant casual dining sector increased 14 basis year-over-year (YOY) to 6.73%, according to the 2021 Net Lease Casual Dining Report from The Boulder Group.