After the pandemic slashed net lease sales in the Spring, the market really came on in the end half of the years.
BJ Feller, managing director and partner for Stan Johnson in Chicago, Ill., expects that momentum to continue in 2021.
“We believe that 2021 will be a year that is incredibly similar to what we saw in the second half of 2020,” Feller says. “In-flows of capital from virtually all segments will be very robust, however highly weighted towards long-term, investment-grade leases, with a continued emphasis on essentially uses.”
Feller says the most significant variable affecting valuations in 2021 could be the transition from the Trump administration to the Biden administration. “Despite the unprecedented disruption that posed in January, market investors seemingly shrugged it off and powered on their aggressive acquisition targets,” Feller says. “Capital markets conditions appear to bode well for a strong market, with the 10-Year Treasury bill hovering around the 1% level, which means all-in coupons for long-term fixed CRE financing are likely to be less than 4%, further spurring acquisitions.”
Institutional net lease investors came on strong in Q4. For 2020, overall, domestic institutional investors were the top buyers of single-tenant office (35% of sales). Domestic private buyers (32%) bought the most industrial, but domestic institutions were second (29%). Domestic private buyers claimed 68% of single-tenant retail and domestic institutions were a distant second at 15%. Domestic public REITs purchased 10% of office, 19% of retail and 11% of retail.
In 2021, Craig Tomlinson, senior director and partner in Tulsa, Olk., can see all groups getting more aggressive.
“It’s hard to pick a winner just yet,” Tomlinson says. “The private market, driven by 1031 exchanges, will be robust, especially in the lower end. REITs and funds continue to be attractive to small investors, especially when the Dow is trading in the 4-cap territory. They will all grow.”
International investors, who claimed 12% of single-tenant office, 15% of single-tenant industrial and only 2% of retail, will also be a factor.
“Foreign investors will set the bar in the high-end of the market for trophy assets. For them, it’s all about wealth preservation as opposed to healthy coupons,” Tomlinson says.
In Q4, the market was especially strong with $20.5 billion in sales, which was the fifth strongest quarter ever. Tomlinson expects that momentum to carry over into 2021.
“The fourth quarter was like the first day of summer – investors across the board decided that things are going to be OK, and they should start putting all the cash they’d been saving to work,” Tomlinson says. “Once a few of them got in the pool, everyone got in the pool. While the first quarter has been historically lower than the fourth quarter for net lease asset purchases, the current momentum can only be stemmed by a real rise in long-term borrowing costs, like .75-100 basis points.”