Industrial Is the Hottest Net Lease Asset in Phoenix

Article originally posted on Globe St. on October 13, 2021

Along with everyone else, net lease investors are fleeing major West Coast hubs to Phoenix.

During the pandemic, people traded city life on the West Coast for Phoenix—and investors have followed. While multifamily and build-to-rent housing has caught most of the attention, net lease investment is also on fire, and industrial is the favorite net lease asset class, according to Judi Butterworth, SVP at Orion Investment Real Estate, who is talking about the trend at the Net Lease conference on October 28.

“We have been benefitting from the mayhem on the West Coast,” Butterworth tells, adding that regulation and taxation are driving people from California, Oregon and Washington to Phoenix. “It is overwhelming. If you look at the net lease buyers, there are a lot of people coming here that are selling their properties in California and then bringing the money to Arizona because they have lost faith in California or because everything in California is too expensive.”

Both large institutional players and small family investors are active in Phoenixes’ net lease market. Butterworth is frequently working with investors looking to trade out of California assets and into net lease properties in Phoenix. “A lot of the deals that I have done are family investors that have sold an apartment complex, and then the money is disbursed and they come to Phoenix and trade into something else. The easiest something else is going to be a net lease investment,” she explains.

Larger investors are primarily focused on industrial properties. “The most money is going to industrial,” says Butterworth. “It is usually a single-user. Developments are being pre-sold before they are even built. Industrial is the biggest beneficiary from a big money perspective. We are getting a lot of developers from the Midwest, and they are building speculative developments and still getting them presold. That is how hot it is.”

Retail is next in terms of popularity. Butterworth says that due to demand, net lease retail includes a broad swath of properties from major fast food chains to tattoo parlors. One reason investors are open to a variety of users: retail strength through the pandemic. “There are hardly any empty boxes, and the ones that were empty are being taken over by new users,” says Butterworth. “Everything has been backfilled, and that is without Amazon doing any type of expansion in our market. We have had natural absorption of vacant spaces.”

The success of net lease assets has drawn new investors into the market, increasing the buyer pool and compressing cap rates. “There are too many buyers for too few properties,” says Butterworth. “It has been an interesting 18 months.”