Interest in Office Sector on the Rise as Return-to-the-Workplace Plans Gain Momentum
San Diego Ranks 13th Across All Markets
San Diego Net-Lease Investments Rise 116.7 Percent Year Over Year
San Diego CA— Investment in U.S. net-lease properties was close to pre-pandemic levels in Q1 2021, driven by robust institutional acquisition activity, increased interest in office assets as return-to-the-workplace plans gained momentum and, despite COVID-19 related international travel restrictions, resilient foreign investment, according to the latest research from CBRE.
Net-lease properties are characterized by a lease structure in which the tenant agrees to pay a portion or all of the taxes, insurance fees and maintenance costs in addition to rent. While net-lease investment activity (comprising office, industrial and retail properties) decreased by 2.6% year-over-year in Q1 2021 to $14.3 billion, volume was up by 10% from pre-pandemic Q1 2019. The decline for total U.S. commercial real estate volume in Q1 2021 was deeper at 18.3% year-over-year.
San Diego ranked 13th across all markets for total net-lease investments in the first quarter of 2021. In the region, Q1 net-lease property investments increased 116.7 percent year-over-year to $288 million, which was the fourth highest year-over-year change of the top 20 markets. San Diego also placed 12th in office net-lease investment activity, more than doubling to $89 million. The region also ranked 11th in the industrial sector, as investment in this asset class increased 1,541.6 percent year-over-year to $181 million. This was the second highest year-over-year change in the industrial sector out of the top 20 markets.
“Given that San Diego is expericing positive growth compared to other larger cities, we continue to see record buyer demand for our net-leased properties, with roughly 90 percent of the buyer demand is coming from Orange County and Los Angeles-based buyers,” said Senior Vice President Matt Pourcho.
He added, “Right now, it feels like demand is higher than pre-pandemic levels, especially with so much 1031 exchange capital chasing limited inventory. Demand is so high that most of our inventory is selling quickly at record pricing.”
The office sector’s share of total net-lease investment volume increased by 5.2 percentage points from the year-earlier Q1 to 41.5%, with its largest first quarter volume on record at nearly $6 billion. The industrial sector continued to attract the most net-lease capital with its share remaining relatively unchanged at 43.4%, while the retail sector’s share fell by 5.4 percentage points to 15.1%.
Institutional and equity funds, the largest net-lease buyers this quarter, increased their acquisition activity by 40% year-over-year in Q1 2021 to $6.7 billion. Private investment in net-lease properties grew by 6.7% over the same period to $6.3 billion. REIT net-lease investment volume was down by 44% year-over-year in Q1 2021 to $1.4 billion.
While the COVID-19 downturn and travel restrictions have restricted international investors in acquiring U.S. net-lease assets, Q1 2021 foreign investment volume still increased by 8.7% year-over-year to $1.7 billion. International buyers accounted for 11.6% of total net-lease volume in Q1 2021, above the five-year Q1 average of 11.1%. San Francisco, Richmond, Boston, Los Angeles and New York City had the most net-lease international investment in Q1 2021. Singapore, South Korea, Canada and Kuwait comprised 75% of all offshore capital targeting U.S. net-lease properties for the year ending Q1 2021.
The net-lease sector is attractive to investors because the long-term leases and creditworthy tenants are considered safe attributes during an economic downturn. During the COVID-19 pandemic, the net-lease share of total commercial real estate volume increased to 14.7% in 2020 from 13.5% for full year 2019. The sector exhibited a similar trend during the GFC when its share increased to 15.1% for full year 2009 from 8.7% for full year 2007. For the year ending in Q1 2021, while total net-lease investment volume declined by 25.9% compared with the same period last year as the COVID-19 economic downturn stalled transaction activity, it comprised 15.4% of total commercial real estate investment volume.
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