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. Northern New Jersey was among the top 20 leading target markets for investors in the office and retail sectors, ranked 18th and 15th, respectively.
Elsewhere in New Jersey, the state capital of Trenton saw a more than 600% increase in net-lease investment activity year-over-year at $234 million, second in growth to only Provo, Utah as net-lease investors are increasingly attracted to high-growth secondary and tertiary markets.
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.
“Northern New Jersey continues to attract investors seeking high-growth opportunities, specifically in the office and retail sectors,” said Karly Iacono, a senior vice president for CBRE Capital Markets. “In fact, some of the largest four-quarter percentage gains occurred in New Jersey, which experienced a total volume of $356 million during Q1 2021 in office investment, and $148 million in retail.”
The office sector’s share of total net-lease investment volume increased by 5.2 percentage points from Q1 2020 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%.
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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