Private Capital is Flocking to Single-Tenant Net Lease
Single-tenant net lease assets “smooth out volatility and create predictability in a portfolio.”
Investors are increasingly dumping loads of capital into single-tenant and net-lease properties, thanks to their reliable cash flow and longer lease terms, according to a midyear analysis by Colliers.
Colliers researchers said single-tenant net lease assets “smooth out volatility and create predictability in a portfolio,” and noted that investors are increasingly directing their dollars into new spaces.
In 2020 and through the first half of this year, retail accounted for 20% of all investment in the STNL space, as opposed to 31% coming out of the Great Financial Crisis. Currently, STNL retail volume is pushing back toward pre-pandemic levels, with Q2 2021 volume ringing in at $4.1 billion. While drug store pricing is strongest within that sector (and is outperforming the broader retail market), investors appear to be pivoting their capital to industrial (which has captured 46% of the market so far to date), and office (which held steady at 34%, in line with 2015-2019 numbers).
The Los Angeles market is the top industrial STNL market so far this year, with $3 billion in single-tenant activity. San Francisco, which is mainly driven by flex industrial product, hit $1 billion in the first half of the year, and New York City posted $1.1 billion in the same period. Cap rates continue to compress for industrial STNL product, and Real Capital Analytics reports 5% cap rates for the top 25% of deals.
Meanwhile, in the office sector, “investors continue to chase security in the office market, with single-tenant asset sales nearly doubling from year-ago figures,” the report notes. “This represents the largest jump of the three major asset types. On the flip side, volume declined from Q1 to Q2, a drop unique to this asset class.”
Median cap rates continued to compress for office STNL assets, ending the first half of the year at 6.1%.
Overall, private capital is dominating STNL assets, Colliers said, with cross-border, institutional, and REITs accounting for most buyers over the last two years.
“As the economy continues to heal, volume should see further gains,” the report states. “Investors are sitting on record amounts of capital, and with impending tax changes, private capital sources may continue to sell.”