Net Lease News

Net Lease News

Week of November 7th 2022

MARKET

CAPITAL COSTS INCREASE, BUT LIQUIDITY GETS DEALS DONE (CONNECTCRE)

• The Federal Reserve’s continuous effective federal funds rate hike is making capital more expensive to borrow. This is putting the brakes on some commercial real estate transactions. On the other hand, cash-flushed investors are out in full force, pushing forward on deals and opportunities before the end of the year.
• With plenty of liquid capital still available, deals are getting done when buyers and sellers can agree on valuations. Those buyers that have access to liquidity are able to deploy that cash toward top-performing sectors and markets, assuming both continue to provide good, projected yields.
• Many buyers will become increasingly motivated to complete 1031 exchanges, while REITs and other institutional spenders seek value-add acquisitions to finish deploying 2022’s capital.

INFLATION REPORT FUELS OPTIMISM ON FED’S NEXT MOVE (BISNOW)

• Inflation cooled in October, with the consumer price index coming in at an annualized rate of 7.7%, according to the Bureau of Labor Statistics on Thursday. That is down from 8.2% in September, and is the smallest annualized increase so far in 2022.
• The core rate of inflation, which excludes the volatile food and energy sectors, came in at 6.3%. That also represents a slowdown for the metric, which recently recorded a 40-year high.
• A cooling of inflation is what the Fed is aiming for with its recent rounds of interest rate increases. Further drops in inflation would presumably remove some of the impetus for the central bank to continue its aggressive course of rate hikes.

INDUSTRIAL

AMAZON’S STRATEGY FOR BIG INDUSTRIAL SPACE CUTS: START SMALL (COSTAR)

• A new analysis of the 48 Amazon distribution centers across the United States listed as available for lease on CoStar through October this year found that Amazon’s efforts to trim its industrial portfolio have concentrated on shedding smaller facilities, often in secondary markets.
• A CoStar review found that smaller distribution facilities of less than 100,000 square feet are disproportionately represented in the space Amazon has put up for sublease in 2022 by a ratio of two-to-one.
• The review looks at existing facilities Amazon has either put up for sublease or allowed to go back on the market by choosing not to renew existing leases approaching expiration. Together these properties total 7.8 million square feet around the country.

BATTERY DEVELOPER PLANS $2.6 BILLION FACTORY NEAR ATLANTA (COSTAR)

• Freyr Battery, a European maker of batteries used in renewable power storage and electric vehicles, plans to construct a $2.6 billion factory in Atlanta, becoming the latest energy company to pick Georgia for a big industrial project.
• Georgia state officials have aggressively recruited companies in the energy and electric vehicle industries, including both automotive and battery manufacturers. It provided $1.8 billion in financial incentives to Hyundai and a $1.5 billion incentive package to Rivian Automotive to develop automotive factories in the state.
• Battery manufacturers are also flocking to Georgia. SK Battery America is nearing completion of the first phase of a $2.6 billion plant near Athens to make lithium-ion batteries for Ford and Volkswagen.

RETAIL

IN NEW CONTRARIAN STRATEGY, TARGET BEGINS ROLLING OUT LARGE-FORMAT STORES (COSTAR)

• The Minneapolis-based company plans to roll out larger-format stores, featuring expanded space for online fulfillment services and a greater selection of groceries.
• Target’s new initiative goes against the recent trend of retailers — even Target itself — opening smaller-format stores in order to less expensively increase their physical footprint or to get a beachhead in tight urban markets where large space isn’t available.
• Starting next year, more than half of Target’s roughly 200 full-store remodels and almost all its 30 new stores will include elements of the new design. Beginning in 2024, all of Target’s remodels and new stores will feature the majority of the reimagined store design elements.

HEALTH-FOCUSED BRANDS WELCOME SPIKE IN FRANCHISE INTEREST (QSR MAGAZINE)

• During the height of the pandemic, sales at most established pizza franchises soared. Pizza was easy, and most of all, comforting, during a time of heightened stress. But as conditions stabilize, health-oriented franchises are bouncing back and expanding.
• Take Rush Bowls, which is dedicated to healthy fruit and vegetable bowls. It launched in 2004 and started franchising in 2016. It has grown to 37 locations, with 35 franchised and two company owned, covering 21 states.
• Locations are also rising at Vitality Bowls, which now has 130 outposts, seven corporate owned, and the rest franchised, in 19 states.

THE CEO OF SQUEEZE IS BORROWING DRYBAR’S PLAYBOOK TO BUILD A SELF-SUFFICIENT FRANCHISE MODEL (BUSINESS INSIDER)

• With her Drybar learnings, Webb and her cofounder, Michael Landau, began taking action on a new massage studio concept in 2017, and they tapped Drybar’s former VP of marketing Brittany Driscoll to help make it happen.
• Squeeze’s flagship location in Studio City, California, opened in March 2019 and racked up nearly 1,000 members in its first year, during which it brought in $1.6 million.
• Even after a year of pandemic-related closures starting in March 2020, 55 additional storefronts are currently in development. According to Driscoll, the brand remains on track to scale to 300 to 500 units in the next seven years.

SPECIALTY

CAP RATES COMPRESS FOR EARLY LEARNING ASSETS (GLOBEST)

• Cap rates have continued to compress for early education centers in the net lease space during this quarter, according to a new report from B+E Net Lease. On-market cap rates hit a record low in Q3 for such assets, with the average breaking 6% at a 5.99% cap.
• Single-tenant net lease investors have flocked to early learning assets as of late, with traditional private capital joined by such groups as publicly traded REITs, private funds, syndicators, and family offices.
• Larger players tend to dominate the space, led by The Learning Experience, KinderCare, Childtime, Guidepost Montessori, and Kiddie Academy leading the way.