Industrial Becomes Top Choice for NNN Buyers

Industrial has been called the darling of the commercial real estate sector as a whole. Now, has become the top target for triple-net lease investors as well. The expansion of the ecommerce market has created strong demand for big box and single-tenant triple-net industrial facilities. The asset class has quickly become the most coveted in the niche market.

“It seems a distant past that for most net lease investors the acquisition appetite for industrial was quite low,” Matt Berres, executive managing director at Newmark Knight Frank, tells GlobeSt.com. “Now given robust e commerce activity along with significant big box industrial development to satisfy the demand, industrial is the darling of the net lease sector.”

While the strong demand in the sector has certainly stimulated investor appetite, buyers are also attracted to the long runway and stability of the market. This is particularly true for warehouse, distribution and third-party logistics facilities. “Most research experts point out that it’s the only asset class where you can still experience long term rent growth opportunity during an investor’s hold period and lenders are underwriting very favorable terms in order for investors to acquire at aggressive cap rates in gateway markets,” adds Berres. “Federal Express warehouse buildings for example continue to remain very high on investors’ radars.”

In retail triple-net investments, capital has started to pick up deals in secondary and even tertiary markets. Industrial is no different. Demand stretches beyond primary infill markets. “Several key institutional players in the net lease space have focused on the secondary markets given the cost of capital along with the spread that it offers in comparison to gateway markets,” says Berres. “There’s solid growth opportunity in secondary markets as e-commerce continues to expand and with this rise of online purchasing, companies are opening distribution centers and warehouse type facilities in secondary markets.”

Despite the strong appetite in the space, investments in secondary markets can capture healthy returns and strong cap rates, especially compared to primary markets. “Because of the long term commitment from the tenant, investors are comfortable with the solid real estate fundamentals,” says Berres.” Many of these properties are acquired in the 7 to 7.5% cap rate range which can be anywhere from 100 to 200 basis points wider than the major markets and offer an attractive return for investors.”