Net Lease News

B+E Weekly Newsletter

January 23 – January 29, 2024

MARKET

AMERICA SHOCKS ECONOMISTS AGAIN WITH 3.3% FOURTH-QUARTER GDP GROWTH | Fortune

• The nation’s economy grew at an unexpectedly brisk 3.3% annual pace from October through December as Americans showed a continued willingness to spend freely despite high-interest rates and price levels that have frustrated many households. For all of 2023, the economy grew 2.5%, up from 1.9% in 2022.
• The economy’s outlook had looked far bleaker a year ago. As recently as April 2023, an economic model had pegged the likelihood of a U.S. recession over the next 12 months at close to 99%.
• Even as inflation in the United States has slowed significantly, overall prices remain nearly 17% above where they were before the pandemic erupted three years ago, which has exasperated many Americans.

COMMERCIAL REAL ESTATE LENDING FORECAST TO REBOUND FROM HISTORIC LOWS | CoStar

• Supply of credit from traditional lenders is likely to remain limited. This creates a meaningful opportunity for alternative debt providers to increase their share of new originations.
• Private debt funds, mortgage REITs, and other specialty lenders are taking an increasing market share of commercial real estate debt commitments. As a result, they are also attracting a larger share of investor capital. Pension funds, for example, committed $5.98 billion to private debt funds through the first nine months of 2023. That fund flow should continue this year.
• On top of this, borrowing demand should increase as real estate debt maturities keep mounting.
• While over $700 billion in loans were set to mature in 2023, many of those loans have been modified through a ‘blend and extend’ strategy, whereby lenders asked for additional collateral from the sponsor, adjusted the interest rate, and provided short-term modifications to the loan.
• Traditional bank lenders are grappling with mounting delinquencies in their commercial real estate loan portfolios associated with office and regional malls. That has opened up a window for more alternative lenders to step forward this year.
• Looking ahead into 2024, optimism for real estate debt remains steadfast, driven by the characteristics of a ‘lender’s market’ and creating an environment ripe for investment opportunities. Alternative debt providers, capitalizing on the vacuum created by an absence of traditional lenders, now wield substantial pricing power.

INDUSTRIAL

REINVIGORATED US CONSUMERS, LEAN INVENTORIES SET STAGE FOR UPSWING IN INDUSTRIAL TENANT DEMAND | CoStar

• Demand for industrial space slowed across nearly every major U.S. city last year as declines in both business inventories and imports meant fewer goods moving through distribution centers across the country. But that may prove short-lived.
• The two economic indicators most highly correlated with U.S. industrial space demand over the past 20 years are nationwide spending on goods and the amount of merchandise U.S. businesses keep on hand. Both indicators were gaining momentum heading into 2024.
• Consumers’ purchasing power is improving as inflation gradually ebbs and wages continue to rise. Inflation-adjusted personal income rose 4.3% nationwide over the past 12 months, easily outpacing its average annual growth of 2.7% recorded during the five years prior to the pandemic.

RETAIL

FOR RETAILERS, BUSINESS IS BACK AND LANDLORDS SAY NO MORE RENT DISCOUNTS | The Wall Street Journal 

• Retail property owners are shedding the discounts and other concessions they offered struggling tenants during the depths of the pandemic, the latest sign that competition for retail real estate is intensifying.
• Vacancies at U.S. shopping centers fell to 5.3% in the fourth quarter. Average asking rents rose to $23.70 a square foot and are now nearly 17% above 2019 levels.
• Owners of enclosed malls, who historically have been more open to percentage-of-sales agreements, have been pushing to convert leases to fixed-rent structures with overage rent. Certain shopping centers surveyed saw revenue from overage rent increase 44% last year compared with 2022.

POTBELLY’S EYES 2024 GROWTH LED BY FRANCHISED STORES | Chain Store Age

• The company has signed 192 new development agreement commitments, putting Potbelly on track for rapid growth in 2024. 
• Since launching its Franchise Growth Acceleration Initiative, Potbelly has signed shop development agreements across the country, including in New York, Maryland, Florida, Ohio, Washington, Arkansas, North Carolina, Tennessee, and Texas.
• Potbelly says its long-term goal is to reach 2,000 shops, with approximately 85% of those locations being franchised.

TARGET’S ‘WINNING RETAIL FORMAT’ INCLUDES LARGE AND SMALL STORE EXPANSIONS | Chain Store Age

• Target Corp. is pulling back the curtain on its 2023 new store openings and remodels for a glimpse of what’s to come as the retailer sets an ambitious pace moving into 2024.
• Target opened 21 new stores across 10 states nationwide in 2023, nearly half of the store openings were in California and New York.
• Target remodeled more than 160 existing stores across the country in 2023. The updates included adding more space for drive-up and order-pickup services, new fitting rooms, and remodeled employee spaces. Full grocery was also added to some locations.