Net Lease News

Net Lease News

February 21 – February 27, 2023

MARKET

EXPERTS KEEP GUESSING AT WHEN THE U.S. WILL SEE A RECESSION

• Experts are at odds over when a recession might occur. On the whole, they’re expecting one. But timing is the question. 
• Estimates of inflation-adjusted gross domestic product or real GDP, inflation, labor market indicators, and interest rates are all widely diffused, likely reflecting a variety of opinions on the fate of the economy—ranging from recession to soft landing to robust growth.
• For example, 58% of the respondents expect a recession this year, but only a quarter expect it by March. A third now are expecting a recession in the second quarter of the year, while 20% say the third quarter.
• One of the challenges facing prognostication is the ongoing volatility of economic conditions. For example, the Federal Reserve Bank of Cleveland in its most recent analysis of yield curves, shows the shifts conditions seem to predict. In December, the probability of a recession within one year was 53.8%. By January it had grown to 63.3%. Now, in February, it is down to 62.7%. Next month, who knows?

SENTIMENT INDEX: THERE IS UNCERTAINTY WHERE ASSET PRICES WILL LAND

• The market overall remains in a period of price discovery, according to the Q1 2023 Real Estate Roundtable (RER) Sentiment Index, which rose slightly compared to the prior quarter.
• Survey participants overwhelmingly indicated that the availability of debt and equity capital is worse today compared to one year ago (93% and 82%, respectively).
• The Index confirmed what most have been reporting in recent months that those with capital are eager to deploy it, but the refinancing environment has been persistently challenging “not only in terms of the banks’ willingness to lend but with absolute interest rates being higher, which in turn hurts internal rates of return.
• The current conditions are a shock to our system. As firms wait on the Federal Reserve, there’s no clarity on pricing and everyone is wondering if it’s going to be a hard landing or a soft landing. Most people are optimistic that this will not be a long recession.

NET LEASE WILL LIKELY REBOUND FASTER FROM ECONOMIC SLUMP

• The Fed’s recent string of rate hikes have led to tough times for commercial real estate investors, even for the relatively stable net lease sector.
• With the Fed lowering their rate increases, the chaos and panic in the market will start to even out and we’ll see some cooler heads prevail in late 2023/early 2024,” she says. “In general, I expect developers will continue to accept lower margins, tenants will have to pay more rent, and everyone’s pipeline will be a little softer than we all would love for it to be.
• Net lease investors should remember their assets are still among the best possible investments, especially from a stabilization and diversification standpoint.

INDUSTRIAL

TARGET INVESTS $100M TO EXPAND NEXT-DAY DELIVERY SERVICE

• Large retailers as well as specialty niche chains, like apparel makers Gap and American Eagle Outfitters, have been expanding their e-commerce and logistics platforms to offer an alternative to Amazon, which is charging third-party sellers half of their sales to use its platform.
• The discount retail chain will add more than six new facilities—Target calls them sortation centers—by the end of 2026, bringing the total number of last-mile delivery logistics centers to 15.
• According to Target, the sortation center strategy has enabled the retail giant to engineer a 150% increase in its next-day deliveries. The sortation centers delivered 26 million packages last year, a total Target expects to nearly double, to 50M, this year.
• The $100M logistics upgrade at Target also includes a partnership with Shipt for an expansion of fleets of delivery trucks, as well as routes that drivers are taking: Target has expanded its routes and is funding larger capacity vehicles that can hold up to eight times more packages per route.

RETAIL

BP EXTENDS CONVENIENCE STORE FOOTPRINT WITH $1.3B DEAL FOR TRAVELCENTERS OF AMERICA

• BP, the British oil giant, has announced that it is acquiring TravelCenters of America (TA) for $1.3B in a cash deal. The acquisition will add 281 highway locations in 44 states operating under the TA, Petro Shopping Centers and TA Express brands.
• TA’s locations include more than 600 full-service and quick-service restaurants as well as gas stations and repair shops for cars and trucks. Each location encompasses about 25 acres.
• BP, which operates an estimated 8,000 off-highway locations globally, said the acquisition of TA will enable it to offer truck fleets and other vehicles “seamless nationwide service” in the US.

ONE OF THE WORLD’S LARGEST MOVIE VENUE OPERATORS PAYS ALL ITS PANDEMIC-DEFERRED RENTS

• Cinemark Holdings, one of the world’s largest theater operators, experienced an “outsized recovery” compared to its rivals, even as the pandemic continued to financially weigh on the industry with a lack of new blockbuster movie releases and limited operations last year.
• Gamble told investors that Cinemark has paid back substantially rent deferred during the outbreak of the pandemic in March 2020. That was one of a few milestones the company reached in 2022, including seeing a “sizable increase” in worldwide revenue and generating $25 million of cash flow. 
• In terms of growing the company’s footprint, Cinemark was unlikely to return to the growth levels seen prior to the pandemic — equating to 75 to 100 new screens — in the next four years. However, Cinemark does have some new theater projects that it committed to prior to the pandemic that are still expected to move forward.

CHEESECAKE FACTORY LOOKS TO FILL UP ON NEW RESTAURANTS AS CUSTOMERS RETURN TO DINING ROOMS

• Cheesecake Factory plans to spend up to $175 million in the coming year as it opens as many as 22 new restaurants nationwide, responding to economic cues including an easing of staffing and cost pressures as customers return to full-service dining.
• Those include five to six locations of the flagship Cheesecake Factory, along with five to six North Italia locations, three to four Flower Child restaurants and up to six others under Fox Restaurant Concept brands that Cheesecake Factory acquired in 2019.
• With staffing returning to pre-pandemic levels in many regions and food cost pressures easing in the early weeks of 2023, the company is standing by a previous goal of growing its location presence by 7% annually. The company currently runs 318 mostly company-owned restaurants in the U.S. and Canada.

WALMART AIMS TO RETAIN AFFLUENT SHOPPERS WITH NEWLY REVAMPED STORES

• Walmart wants to keep attracting higher-income shoppers — even when inflation wanes — with sleek remodeled stores that spotlight and display nongrocery merchandise such as apparel and home goods.
• Last year, the discounter, which has 4,717 namesake U.S. stores, had a surge in business from middle- and higher-income shoppers who were pinching pennies on food purchases during that period of record inflation.
• In part to continue to entice such shoppers, Walmart is in the process of remodeling hundreds of its U.S. stores, and in just a handful of them it has debuted a redesigned format that includes furniture and decor prominently displayed, and apparel being showcased on mannequins. The look is similar to the in-store design that one of Walmart’s main brick-and-mortar rivals, Target, has adopted at its locations.

T.J. MAXX, MARSHALLS PARENT ANTICIPATES OPENING 1,400 NEW STORES

• Discount retailer TJX Cos., which operates T.J. Maxx and Marshalls among other stores, envisions opening as many as 1,400 new stores, including 150 this year.
• Despite store closures among Bed Bath & Beyond and several other chains, in-store shopping has regained ground, and discount retailers like T.J. Maxx often benefits in tough economic times as shoppers seek deals.