Net Lease News

Net Lease News

January 3 – January 9, 2023

MARKET

WHAT’S NEXT FOR NET LEASE?

• The effect of rising interest rates registers in many ways around the real estate world, but perhaps the starkest impact can be seen in the investment volume differential in one of CRE’s most popular sectors. Net lease investment volume decreased roughly 35% year over year in the third quarter, noting the Fed’s impact on market players has been far-reaching.
• W.P. Carey is looking for real estate that is extremely critical to operations for its tenants. “Maybe we’re willing to give up a little bit in terms of fungibility for increased certainty that tenants are going to renew and keep paying rent for the long term. Asset classes such as cold storage and food production are extremely important to users and they don’t have a ton of alternative options available.”
• There continue to be more and more deals getting done with private equity sponsorship, and we’d expect that to largely continue in 2023. The trend, a positive one for the industry, really is private equity ownership looking toward sale-leasebacks.

EXPECT FED RATES TO EXCEED 5% IN 2023

• A few days into 2023 and it’s time for some bad economic expectations beyond what most have projected. Bankrate’s 2022 Q4 survey of economists has come in with a consensus expectation that the Federal Reserve’s Federal Open Market Committee will take its benchmark interest rates up to between 5.25% and 5.5%. The average number that the experts offered was 5.35%, well up over the 4.71% average in the third quarter’s survey and the highest since 2001. The economists came in with peak rate expectations ranging from 4.75% to as high as 6.25%.   
• The Fed is going to return inflation to their 2% objective and if they can accomplish that without a recession remains up for debate. The minutes clearly highlight the Fed’s focus on inflation but also their displeasure with the loosening in financial market conditions, which they believed hindered their efforts to achieve price stability.

INDUSTRIAL

INDUSTRIAL SUBLEASE SPACE TICKS UP AS DEMAND MODERATES

• Sublease space is on the rise for the industrial sector, including some inventory that’s been listed in facilities still under construction.
• In addition, an elevated number of spaces greater than 200,000 square feet have been added to the market in recent months. The amount of available sublease space has risen by nearly 46% since the start of 2022 and is expected to continue to increase this year as occupiers continue to reevaluate space needs.
• Much of the available space is listed in facilities still under construction, Ortiz says, in a trend that suggests pre-leased space is likely already being given back to the market in cities like Atlanta, the Inland Empire, and northern New Jersey.
• While it may seem like a sharp drop in demand, large occupiers including major retailers, 3PL companies, and food and beverage companies will continue to expand in 2023. Thus, the industrial downturn should be temporary, and the industrial sector will remain a desired asset for occupiers and investors alike.

MORE POTENTIAL CAR TECH FOR CRE – AUTOMATED PARKING

• Commercial real estate is coming to a point where it must be conversant with technology. Miss out on an edge and your key performance indicators could take a beating compared to competitors who use it with grace and style.
• VEN.AI offers an infrastructure-based solution that has very few requirements from the vehicle side as it guides vehicles via the use of sensors, connectivity (e.g., 5G) and offboard computing to a dedicated parking spot. Automated parking solutions can be implemented in a variety of use cases including the assembly plants where vehicles are produced, outbound-logistics distribution parks, depots for vehicle fleets operators, retail outlets as well as in parking garages as an automated valet service.
• For a commercial real estate operator, a viable system, which could be years in the waiting, might provide a valet parking vibe without depending on human drivers. Properly implemented, it would also speed retrieval of cars after they were sent down into a parking area. It would free time for people working or living in buildings and for guests or consumers. Such systems would also provide additional data on traffic that could be useful in understanding building use and characteristics of those coming and going.

AMAZON UPS LAYOFFS TO 18,000

• Amazon plans to cut more than 18,000 jobs this year as the retailer faced an “uncertain economy,” Amazon CEO Andy Jassy wrote in a memo Wednesday night. “We don’t take these decisions lightly or underestimate how much they might affect the lives of those who are impacted.”
• Earlier this week, Salesforce announced it plans to cut 10% of its workforce, and Facebook’s parent, Meta, announced plans to lay off 11,000 employees in November. In all, tech-driven companies have been cutting staff at a rate faster than any time during the pandemic, The Wall Street Journal reported.
• Amazon has been cutting back on expenditures over the past year. The retailer shuttered experimental or unprofitable business divisions, including telehealth service and delivery robot plans. And after a massive run-up of industrial leasing during the pandemic, Amazon has begun to scale back its use of warehouses, subleasing more than 10M SF across its portfolio. 

RETAIL

FITNESS ASSETS CONTINUED TO DRAW INVESTORS IN Q4

• Fitness assets are expected to continue to draw strong investor demand in the net lease space as consumers continue to prioritize wellness in the wake of the COVID-19 pandemic, according to a new analysis from B+E Net Lease.
• Fitness brands were among the hardest-hit by the global pandemic, as lockdowns shuttered operations and consumers flocked to in-home, tech-driven options. But as Covid restrictions lifted, experiential retail concepts provided lift to the overall sector as foot traffic to fitness centers – and those retailers located in the immediate vicinity – ticked up.
•  As of Q4, B+E notes that while cap rates have gone up somewhat, sales prices also increased by 43% year over year, suggesting the market for fitness properties may be recovering from the pandemic and that the relationship between cap rates and sales prices is “heavily influenced” by market rents

BED BATH & BEYOND, WITH 950 STORES NATIONWIDE, FACING BANKRUPTCY

• Bed Bath & Beyond said in a filing with the Securities and Exchange Commission on Thursday that it has “substantial doubt” about its ability to continue as a going concern, considering losses and negative cash flow that the retailer suffered during most of 2022.
• As of mid-2022, the company had more than 950 stores, most of which are Bed Bath & Beyond locations, but around that time it announced that at least 150 stores would be closed in the near future, and about 20% of its workforce would be fired. 
• One reason for renewed stress on retailers in the new year will be stretched consumers. While a record 158 million Americans shopped on Super Saturday (Dec. 17 in 2022), a 17-year low national savings rate meant that more people were turning to credit cards to do so.

OFFICE

SALESFORCE TO EXIT OFFICE SPACE, SLASH WORKFORCE 10%

• Salesforce Inc. will cut its workforce by 10% and exit some of its office space, according to a filing with the Securities and Exchange Commission on Wednesday, though it didn’t specify where or how much space it would give up.
• The company’s lease at the 875K SF, Boston Properties-owned Salesforce Tower in San Francisco runs through 2031. Salesforce put 350K SF up for sublease in its Salesforce West location in San Francisco last year.
• Salesforce estimates the actions will cost the company $1.4B to $2.1B, including $450M to $650M associated with office space reductions, with the rest related to letting go of employees.