Net Lease News

Net Lease News

April 24 – May 1, 2023

MARKET

FIRST REPUBLIC BANK SOLD TO JPMORGAN CHASE

• Early in the hours of May 1, the Federal Deposit Insurance Corporation closed the institution and sold all deposits and “substantially” all assets to JPMorgan Chase Bank, according to the FDIC.
• As of April 13, 2023, First Republic Bank held $229.1 billion in assets and $103.9 billion in total deposits. JPMorgan Chase has assumed all of the deposits and “agreed to purchase substantially all of First Republic Bank’s assets.”
• The FDIC estimates that the cost of the closure and sale will be approximately $13 billion, though that will come from proceeds of the process and money from the Deposit Insurance Fund, which receives its funding from deposit insurance premiums from banks and interest on FDIC-held government bonds.

INVESTORS BET ON FED RAISING INTEREST RATES AFTER FIRST REPUBLIC FAILURE

• A Federal Open Market Committee (FOMC) meeting is taking place this Wednesday when numerous investors and analysts expect the Fed to hike interest rate .25 basis points to a range of 5.0-5.25 percent.
• If it does occur, it would be the 10th consecutive rate hike conducted since March 2022 when the Fed began raising interest rates when the rate was near zero. Rate hikes were initially a response to a stagnant economy heavily impacted by record levels of inflation in the waning months of the COVID pandemic.
• CME Group, a global derivatives market based in Chicago, has a live probability chart based on analyzing Fed rates and U.S. monetary policy. On Monday, following the collapse of First Republic Bank, the chart showed the possibility of a Fed rate hike as fluctuating between 88 and 92 percent.

CRE SUPPLY AND DEMAND FUNDAMENTALS WILL EVEN OUT IN LONG RUN

• Supply and demand outlook for apartments, retail, industrial, and most niche property types remain promising, especially on a long-term basis.
• CRE completions should taper in 2024-25 and because the cost of construction loans is too high (8% and above), so new construction starts have been declining.
• Industrial is expected to experience a record pipeline. Pace is dragging out a bit, though. This is a positive, as absorption has lost some momentum. Retailers are shrinking their safety inventories because supply chains are betting better. So, retailer expansion and new openings should revive demand next year.

INDUSTRIAL

RECORD TALLY OF INDUSTRIAL PROJECTS NEAR COMPLETION ACROSS DALLAS-FORT WORTH

• In square footage terms, the surge in industrial construction activity that has proliferated across the U.S. since the start of the pandemic marks the fastest acceleration in national construction activity of any commercial property type in more than three decades.
• The Dallas-Fort Worth metroplex, a powerhouse of economic growth compared to most large metropolitan areas in the U.S., has become the epicenter of America’s boom in industrial development, particularly big-box distribution center development.
• Given that the average construction time for industrial projects larger than 100,000 square feet in Texas is about 12 months, the number of Dallas-Fort Worth industrial projects completing construction each quarter should begin to decline significantly by mid-2024 because of the pullback in starts now underway. 
• This will likely set the stage for the market’s vacancy rate to stabilize, or begin tightening again, particularly if growth in retail goods spending has begun to reaccelerate by the middle of next year.

RETAIL

NET LEASE INVESTORS NAVIGATE THE COFFEE WARS

• In the highly competitive world of net lease investments, coffee chains have become a major battleground. With the rise of online shopping and changing consumer preferences, net lease investors have been looking to coffee chains as a safe bet for steady returns.
• In 2022, Starbucks announced they would plan to open 2,000 new locations by 2025, which has led to a surplus of inventory on the market for the tenant. There are over 130 Starbucks on the market with an average asking cap rate of 4.99%.
• Dutch Bros continues its strong growth trajectory with a plan to add an additional 150 stores in 2023. The average unit volume systemwide for Dutch Bros is $1,924,000, which is up 4% compared to 2021. There are currently 70 Dutch Bro’s assets on market, with an average cap rate of 4.58%. 

MCDONALD’S WON’T LET A POTENTIAL RECESSION STOP ITS MOMENTUM

• In the first quarter, U.S. same-store sales lifted 12.6 percent year-over-year. The exact growth happened in McDonald’s International Operated Markets (IOM) and its International Developmental Licensed Markets (IDL). 
• In 2022, for the first time in eight years, McDonald’s experienced net growth in the U.S. This year, the plan is 4 percent global expansion or net growth of about 1,500 units. Kempczinski said the brand’s performance has “earned us the right to open new restaurants at a faster rate than we have historically.”
• One of the driving factors of this confidence is top-line growth in the face of double-digit inflation, which is expected to lighten as the year goes on. The brand has started to see the benefits of this shift. In the U.S., franchisees returned to cash flow positive in the first quarter.

BARNES & NOBLE DOUBLES DOWN ON EXPANSION

• While Amazon was busy shutting 99 of its overextended logistics facilities in 2022, Barnes & Noble opened 17 new stores last year.
• This week, the NYC-based company said it is doubling down on its expansion strategy in 2023: Barnes & Noble will open more than 30 new stores this year, including four outlets that already have debuted.
• The bookseller said in a statement that it is experiencing increasing sales—a phenomenon it credited in part to what is becoming known as M-Commerce driven by social media, which Barnes & Noble said is fueling a “significant expansion of the market for physical books driven by word-of-mouth and social media recommendations.”

SUBWAY CLOSED 571 U.S. STORES AHEAD OF POSSIBLE $10B SALE

• Sandwich giant Subway franchisees closed a net 571 locations in the United States in 2022, or about 2.7% of the total store count, ahead of a possible sale of the company for $10B, citing corporate documents.
• In January, Subway said that it was exploring a possible sale, but did not commit to it. A number of private equity players are reportedly interested in buying the sandwich-maker.
•  However the current economic climate, and especially high interest rates, might make it tough for the company to obtain its $10B asking price.