Net Lease Investors Spend Big in the Inland Empire
Net lease investment volumes grew 105% last year in the Inland Empire, the second strongest gains in the country.
“Development of commercial and residential projects ceased to exist after the Great Recession in 2008, while the market has been in a 10-year bull run and housing growth and demand for industrial real estate, particularly in the Inland Empire, have been incredible strong,” Ian Schroeder, an SVP at CBRE, tells GlobeSt.com. “So demand for this type of real estate has been very strong. We have seen a number of large net-leased industrial sales achieve record cap rates, which undoubtedly contributed to the region’s higher numbers, as well.”
The retail market has also helped to drive investment activity. “While the multi-tenant shopping center market has lagged the cap rates of single-tenant properties especially in non-core markets like the Inland Empire, owners are finding it accretive to break up their multi-retailer centers to maximize proceeds,” says Schroeder.
In terms of annual gains, the Inland Empire came in second to San Diego, and in terms of total investment volume, the Inland Empire came in sixth in the nation, behind Los Angeles. The market has certainly gained from a lack of opportunities in Los Angeles and Orange County. “There hasn’t been the same level of development in Los Angeles and Orange County, which has resulted in very little supply in those areas,” says Schroeder. “If you’re a net-lease investor in an exchange and you are looking to buy in Southern California, you end up looking at properties in the Inland Empire because there is more inventory and better yields.”
Investors are largely heading to the Inland Empire to chase yield. “We are seeing record low cap rates across Southern California,” says Schroeder. “It’s really a supply and demand issue. There aren’t enough quality assets—pertaining to credit and location—to meet investor demand, which is still largely driven by the 1031-exchange markets.”
The growth that surged in 2019 could stall this year, with some obstacles on the horizon. “It’s hard to say how this year will play out especially with the upcoming elections and the current corona virus situation,” says Schroeder. “If apartment market sales stay robust, that will continue to create demand in the net lease space in the Inland Empire and across the region. Also, with yields around the world tracking toward zero, I believe net lease assets will offer a nice place to find yield on hard assets. And if the treasury stays in record low territories, borrowing costs will follow and cap rates will likely do the same.”