industrial Net Lease
City Electric in South Florida
Net lease real estate refers to properties in the office, industrial, and retail sectors that is designed to lower operational risk through a lease that shifts responsibility of certain property costs from the owner to the tenant.
Net leases are long-term contractual obligations with creditworthy tenants that typically feature annual 2-3+% rent growth providing surety of income throughout the economic cycles.
Sector specific industrial net lease strategies provide targeted exposure to the fundamentally strong US industrial real estate sector, where user demand and rent growth provide upside opportunity. Many net lease strategies are diversified, providing exposure to the challenged office and retail real estate sectors.
What is industrial net lease real estate?
Industrial net lease strategies focus on investing in mission-critical industrial properties occupied by creditworthy businesses to manufacture, store, or distribute physical goods. Industrial real estate ranks as one of the most fundamentally sound sectors of commercial real estate, with historically low vacancy levels and consistent rent growth. Demand drivers include ecommerce growth, manufacturing investment and supply chain reconfiguration.i
Net leases are a type of lease structure that can lower operational risk by placing responsibility for property operating expenses, maintenance, repairs, and capital expenditures on the tenant. These net leases are typically 7-20 years in length and feature annual contractual rent growth ranging from 2-3+%.
A key consideration for net lease investment managers is the credit quality of the tenant given that these properties are typically occupied by a single tenant, and the duration of the lease contracts are long—in some cases these exceed 10 years in length.
Industrial net lease strategies that invest in properties occupied under long-term net leases by creditworthy tenants are designed to provide investors with durable income and secular industrial tailwinds.
Who uses industrial real estate?
Engage in the production and assembly of new products on a large scale. Vehicles and auto parts rank as one of the largest categories of US manufacturing.
Rely on expansive networks of warehouses to supply stores and to meet growing consumer expectations for quick, affordable product delivery.
Prepare raw agricultural products for final consumption, a critical, needs-based activity that shelters the subsector from broader macro volatility.
Move goods through the supply chain in industrial real estate including warehouses, truck terminals and industrial outdoor storage facilities.
What are the common building types?
Facilities including warehouse and distribution centers, truck terminals and industrial outdoor storage facilities support the storage and movement of goods from factories to end consumers.
And other food supply chain facilities could include canneries or bakeries. Cold storage is also a key part of food supply chains with refrigerated areas for perishable items.
Facilities contain assembly lines and advanced machinery used to produce finished goods.
Light Industrial Buildings
Including flex buildings, R&D buildings and specialized manufacturing properties are multiuse buildings that include warehousing, office space, and manufacturing areas. They are typically located in business parks.
What are the secular drivers for industrial?
Ecommerce: Online spending continues to accelerate, and total annual sales have jumped nearly 60% over the past five years to $1.1 trillion. As shoppers increasingly gravitate toward digital outlets, online sales are expected to continue climbing.ii
Manufacturing Investment: The US is experiencing a surge in advanced manufacturing investment that is expanding industrial capacity. Construction spending on new factories has jumped 170% since 2018, far outpacing expenditures on other building types.iii The US is the top destination for foreign direct investment, which is primarily flowing into goods-producing sectors in part because of new federal measures to invigorate domestic manufacturing.iv
Limited Supply: Limited supply and muted new industrial development activity should keep industrial fundamentals stable. National industrial vacancy is approximately 5% today and is forecast to drift higher through 2024 to approximately 6.5%, levels that historically have supported strong rent growth.
Spending on US Factory Construction is Surging v
The US is Capturing an Outsized Share of Global Capital vi
How are net lease contracts different?
Commercial real estate leases are legally binding contracts between a property owner and a tenant. The amount of rent a tenant pays is determined through negotiation, and net leases often include provisions for fixed contractual increases in rents at regular intervals (typically annually) during the lease term.
Net leases also dictate who will pay for operating and capital costs associated with the property. These typically fall into one of three primary categories:
Property taxes charged by local governments are based on the appraised value of the property.
Insurance includes premiums and deductibles for policies that provide protection against property damage, theft, or liability.
Operating expenses including utilities, cleaning, landscaping, snow removal, among other day to day operating costs necessary to run a tenant’s business in the facility.
Maintenance, repairs and capital expenditures can include both recurring property maintenance costs, repairs, such as fixing a leak in a roof, or capital expenditures, such as replacing the parking surface or the roof membrane.
Leases that transfer responsibility for most, if not all of these cost items onto the tenant are known as net leases, or triple net leases (“NNN”). In contrast, gross leases require the building owner to manage and pay some if not all of the building costs (e.g., real estate taxes, insurance, operating expenses, maintenance, repair and capital expenditures).
Regardless of lease type, owners maintain title to the property and must pay to service any loans that are tied to the asset.
Net leases shift operating costs onto tenants
Decreasing Landlord Capital Exposure to Risk and Volatility
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