TULSA, OKLA. — Sales of net leased properties settled in at nearly $11.4 billion during the third quarter of 2017, up 15 percent over the average for the past five third quarters ($10 billion), according to a recent report from Stan Johnson Company, a national brokerage and advisory firm specializing in net leased assets. The report tracks net leased properties across the office, industrial and retail real estate sectors.
“This was the largest third-quarter move in six years and represents resilience in the net lease sector,” says John Zimmerman, director of Tulsa-based Stan Johnson Company. “We may be on our way to another record sales year.”
The total is the highest quarterly sales volume in the past 12 months and follows a lackluster second quarter that saw investment sales volume drop more than 20 percent below the average for the past five second quarters.
John Zimmerman, Stan Johnson Company
Growth occurred across all net lease sectors, with office, industrial and retail increasing 35 percent, 43 percent and 55 percent, respectively. The results were overwhelmingly driven by growth in the sheer number of transactions — more than 750 — as opposed to the amount of the assets traded.
“In recent years, a lot of the growth of the sector has been due to trophy assets in 24-hour markets, especially office,” says Craig Tomlinson, senior director of Stan Johnson Company. “The top 10 percent of closings still accounts for more than half of net lease sales, but the lower end of the market appears to be pulling more of its share.”
After cap rates rose for the first time in seven years during the second quarter, the average cap rate for net leased assets promptly fell again during the third quarter by 10 basis points to 6.35 percent. Both office and industrial cap rates retreated with retail caps remaining essentially flat.
“It’s a combination of things,” says Zimmerman of the cap rate fluctuation. “We are still in a historically favorable interest rate environment for net lease borrowers, and yields on alternative investments just keep compressing.”
The report notes that sale-leaseback transactions accounted for $1.08 billion, or nearly 10 percent, of the total quarterly investment activity. About half of those deals involved office properties; 40 percent centered around industrial assets with the remaining 10 percent being retail deals.
Office Deals Dominate
Quarter-over-quarter sales of net leased office properties grew by $1.2 billion, or 35 percent, to $4.7 billion during the third quarter. Office sales accounted for 42 percent of the net lease market.
Institutional investors comprised nearly half of the buyer pool, according to the report, which also cited an increase in the average deal size as a driver of the growth. More than one-quarter of the office sales occurred as part of portfolio transactions. Office sales in small markets, which typically comprise less than 12 percent of the office total, were down slightly.
Industrial-Size Growth
Investment in net leased industrial properties also grew by about $1.2 billion to almost $4 billion during the third quarter, a whopping 43 percent increase. Industrial sales made up 35 percent of the market, in line with its five-year average market share.
Craig Tomlinson, Stan Johnson Company
With a value of $1.4 billion, portfolio sales accounted for one-third of the total volume, thanks to a few large portfolio transactions. Small-market industrial sales also rebounded to $879 million, representing 22 percent of all industrial deals.
“Industrial continues to take market share from the net lease retail sector as investors fret over which retail business model Amazon is going to tackle next,” says Tomlinson.
Retail Rebound
With 287 closings, sales of net leased retail properties grew by $1 billion to $2.7 billion, back in line with the five-year average for past third quarters. The retail portion of the net lease pie has been shrinking, however, and now accounts for less than 25 percent.
Private buyers, many utilizing 1031 exchanges, accounted for about half of all sales. Retail assets sold in portfolios represented 32 percent of the quarterly volume while small market retail property sales increased 73 percent. With average cap rates below 6 percent, retail properties are still yielding the lowest returns among net leased assets.
“There are just more investors chasing retail, since the deals are smaller and more investors are familiar with those tenants,” says Zimmerman.
Click here to read the full report.
Stan Johnson Company is a national brokerage and advisory firm that focuses exclusively on net lease transactions involving retail, office, industrial, healthcare and sale-leaseback properties. The quarterly report, “Beyond The Numbers,” merges data from its closings, coupled with analysis from Real Capital Analytics (RCA), and includes trends and transaction comps from the most active market participants.