NEW YORK — When "boom," "wave" and "sky high" are the words used to describe a commercial real estate sector, you know the numbers involved will be next-level. That's how Colliers' Single Tenant Net Lease Report 2021 recounts the sector's record-setting performance last year. According to Aaron Jodka, the CRE company's director of research, U.S. Capital Markets, the STNL sector has many advantages, and has seen a big shift in asset allocation and changing investor composition.
"The market disruption of 2020 shifted capital to the safest of assets and this security has been attractive to investors to the tune of record STNL volume in 2021," Jodka said. "Safety, predictability and a move toward industrial have all been major factors in the STNL market's continued 'institutionalization,' which accounted for nearly 60% of all sector volume last year."
STNL offers many investment advantages. First, the assets offer very durable and predictable cash flows from their long-term leases to credit tenants. Also, a big factor boosting liquidity in the STNL marketplace is the price range on assets. Large institutional investors can build a sizable portfolio, while private investors can pick their profitable spots. And financing such transactions is more straightforward, providing additional liquidity to the sector.
Within the STNL sector, there has been a clear shift in asset allocation with industrial properties capturing a larger share of investment dollars than ever before. In 2021, half of all SNTL capital went to industrial, well ahead of its historical average over the prior 10 years of 38%, according to the Colliers report. Nationally, fundamentals in the industrial sector are terrific with rents at record highs and vacancies at record lows. Jodka calls the shift to e-commerce "nothing less than transformative" for the property type.
"Since industrial leases are structured as triple-net, this asset class is an obvious choice for STNL capital," he added. "Also, potential tax law changes drove private capital to be net sellers on the year. Yet, private equity has long seen the value in industrial properties and have been major buyers in recent years."
Industrial strength is not limited to just major distribution hubs. Markets that 10 to 15 years ago were viewed as locally driven have seen e-commerce and retail tenants expand, Jodka pointed out. As a result, the focus of capital has shifted. And with the record amount of space currently under construction nationwide, investors will have the opportunity to tap into the next generation of modern distribution space.
"Industrial's run is far from over," Jodka said. "The tailwinds for this asset class are secular in nature, not merely cyclical."
Investors love the upside of a recovery and retail's rallying signs have elicited what the Colliers research director calls a "flood" of capital into the sector, with the result being record-high retail STNL sales volumes in 2021. Also, office investors have found safety and security in long-term leased assets, STNL properties being popular choices, of course.
"Even in the middle of the market disruption of 2020, net-leased office assets with prime tenants such as tech companies were trading at or near record pricing in markets such as the Bay Area," Jodka added. "Life science properties, which operate with a net-lease structure, are dominating headlines in core markets such as Boston and the Bay Area."
Need more numbers to support SNTL's glowing description? Colliers reports that the sector's second-half sales volume in 2021 pushed $64 billion, nearly 40% above 2019's numbers during the same period.
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Brian Lee
Brian Lee is an Albany-based litigation reporter for the New York Law Journal. He has worked at daily newspapers in Massachusetts, New York and New Jersey. He can be reached at [email protected]. Twitter: @bleereporter
