In a relatively short period of time, WeWork absorbed a tremendous amount of office space. The company signed long-term leases with landlords, then turned around and subleased office space to short-term tenants. This caused vacancies to decrease below market norms and asking rents to artificially increase.
WeWork’s gambit was to get big fast, get a huge valuation, and then go public. The IPO failed spectacularly, and because the company operates at a loss it’s quite likely they’ll have to begin giving back office space.
In this article we’ll look at how WeWork’s implosion is helping to drive the growing demand for net leased investment in other asset classes.
What WeWork Wasn’t
A recent research report by CB Insights claimed that WeWork is one of the world’s most valuable startups, though just how its business works is widely misunderstood.
As we all know by now, the answer to CB’s article, “How Does WeWork Make Money?” is that it doesn’t. In fact, WeWork is especially adept at losing money, and lots of it.
While it may be entertaining to poke fun at WeWork, office building investors probably don’t get the joke.
Although coworking space only accounts for about 2% of the commercial office real estate in the U.S., according to CBRE, coworking companies were responsible for over half of the net office absorption last year. The National Association of Real Estate Investment Managers noted that co-working and flexible office uses accounted for 58% of net office absorption in 2018, a trend that’s been continuing in 2019, based on reports from CBRE and JLL.
What Happens If WeWork Starts Giving Back Space?
Numerous publications such as Forbes and Bisnow have surveyed commercial real estate experts on the impact WeWork’s implosion could have on the office market, and the answers weren’t pretty: a flood of available space, rent reductions, and building owners with WeWork as an anchor tenant coming under pressure to sell.
SoftBank recently “invested” an additional $10 billion to keep WeWork afloat.
But the fact of the matter is at some point you’ve got to abide by the rules of economics and have positive cash flow in order to stay in business. All of the wishful thinking in the world won’t change that.
Growing Demand For Net Leased Real Estate
So, with the risk of investing in general office space potentially increasing, where are real estate investors placing their capital?
The answer is net leased investments.
In the firm’s “U.S. Net-Lease Investment Report Q1 2019”, CBRE reports that the rising demand for U.S. net-lease real estate generated an investment volume of $68.3 billion in 2018. That’s a 30.1% increase compared to the previous year and the highest annual total since the company began tracking the market in 2002.
Demand in 2019 for net leased real estate remains strong, with investors focusing on net-lease investments in high-growth secondary and tertiary markets. There are a number of reasons why both domestic and foreign investors like what they see in net leased real estate.
Benefits of net leased investments
Net leased commercial real estate offers investors a winning combination of safety, convenience, and ROI. Lenders are making money available for net leased deals, while supply and demand remains robust.
- Property is leased on a triple-net basis to regional and national credit worthy tenants
- Lease terms can be up to 50 years or more
- Lease rates are indexed against inflation, allowing for a periodic step-up in base rents
- Property taxes, maintenance, and insurance expenses (the NNN of net-leased property) are passed through to the tenant
Hottest net lease asset classes
The three asset classes attracting the most interest from net lease investors are industrial, logistics, and medical office property. These classes are hot because the growing demand from ecommerce and healthcare provide future stability and double-digit returns:
- Industrial is the top target asset for triple-net lease buyers, thanks to strong demand for big box product, according to Globe St.com
- Logistics Management notes that prime industrial and logistics real estate is available in strategic secondary and tertiary markets offering strong net rent growth and vacancy rates below the national average
- Medical Office buildings continue to attract strong investment, with about $4.7 billion worth of medical office buildings trading during the first half of 2019 alone, based on a recent report from NREI
How to learn more about NNN leased investments
One way to learn more about net leased real estate is to read the National Real Estate Investor, where you’ll find news, information and analysis about net lease finance and investment.
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