Net Lease News

B+E Weekly Newsletter

May 16 – May 22, 2023

MARKET

BIDEN CONFIDENT IN US DEBT DEFAULT AGREEMENT

• President Joe Biden said Wednesday that he is confident the U.S. will avoid an unprecedented and catastrophic debt default, saying talks with congressional Republicans have been productive as he prepared to leave for a global summit in Japan.
• Negotiators have been scrambling to strike an agreement that would unlock a path forward for raising the debt limit by June 1, which is when the Treasury Department says the U.S. could begin defaulting on its obligations and trigger financial chaos.
• The national debt currently stands at $31.4 trillion. An increase in the debt limit would not authorize new federal spending; it would only allow for borrowing to pay for what Congress has already approved.

MANY FAMILY OFFICES INCREASING ALLOCATIONS TO CRE

• Family offices are largely maintaining or increasing their exposure to real estate. On average, 9% of funds were being put into real estate and infrastructure. The report was based on surveys of 166 institutional family offices with a net worth of at least $500 million.
• Within real estate, 30% of family offices reported that they plan on increasing exposure to the residential sub-sector over the next 12 months, with another 30% looking to maintain their exposure.
• Only 7% of family offices plan to invest more in office space and 4% in retail; 12% and 10% respectively plan to reduce their exposure. At the same time, there is “continued interest in warehouses and logistics centers that support the shift to e-commerce and onshoring” with 13% of family offices saying they plan to increase their exposure to industrial and 28% saying they wish to maintain it.

INDUSTRIAL

HOW DEBT COSTS WILL AFFECT INDUSTRIAL DEMAND THIS YEAR

• Higher debt costs and tighter credit conditions are causing companies with maturing corporate loans to reevaluate capital spending decisions, including allocations for industrial real estate.
• Many markets will encounter rising vacancy as the pipeline delivers into an environment of normalized demand, with an attendant increase in sublease availability. Nonetheless, there are indications that new construction starts will slow, with vacancies tightening in some markets beginning next year.
• The largest amount of real estate backed mortgage debt in history is maturing between 2023 and 2024, and most of these loans were originally issued since 2020 at record low interest rates, which could potentially impact some industrial property values as debt comes due.

RETAIL

A TALE OF RESILIENCE: RESTAURANT INDUSTRY SHINES AS UNCERTAINTY LOOMS

• The pandemic brought major changes to the restaurant experience and forced decision makers to adjust operations to meet evolving demand and provide safe service for their customers. Of the shifting priorities, experience taught the industry that health, safety, and convenience were paramount to ensuring customers felt comfortable.
• In 2023, the restaurant industry is projected to reach $997 billion in sales, more than $100 billion higher than 2019 before the pandemic.
• Restaurant decision makers credit the pandemic for increasing their focus on top-line sales and profit, food safety, relationships between management and employees, equipment needs and cost controls, and subsequently boosting their confidence about the future of their business. 

CAVA, WITH DREAMS OF 1,000 LOCATIONS, DECIDES TO GO PUBLIC

• CAVA confirmed Friday that it will go public after confidentially filing plans to do so back in February. The Mediterranean fast casual is aiming for 1,000 locations nationwide by 2032.
• The company earned $564.1 million in revenue last year, up from $500 million in 2021. Same-store sales grew 14.2 percent in 2022 year-over-year and 23.6 percent versus 2019. In Q1, comps lifted 28.4 percent against last year—marking the company’s ninth straight quarter of positive growth.
• In 2021, the IPO market was hot with five major companies going public Krispy Kreme, Dutch Bros Coffee, Portillo’s, First Watch, and Sweetgreen. Fogo de Chão and MOD Pizza filed for IPOs, but haven’t moved forward yet. 

JACK IN THE BOX PLOWS AHEAD ON AGGRESSIVE GROWTH GOALS

• Jack in the Box has 61 restaurants currently in the permitting, design, or construction phases. That’s the most CEO Darin Harris has seen in his tenure, and the most the company has witnessed in at least a decade.
• Since launching its development program in mid-2021, Jack in the Box has signed 76 new agreements for a total of 335 restaurants, with 69 commitments in fiscal 2023. Highlights include bringing in the first new franchisee in over a decade, the addition of new markets including Florida and Arkansas, and incremental development agreements via Del Taco refranchising, including commitments to bring both brands into new territories. 
• Jack in the Box also recently inked a franchise agreement for 22 restaurants in Northern Mexico. It marked the brand’s first agreement in the country in over 30 years.

QUIZNOS OWNER WANTS TO BUY 50-PLUS HARDEE’S RESTAURANTS

• High Bluff Capital Partners, the parent of Quiznos, Church’s Chicken, and Taco Del Mar, is in the running to purchase bankrupt Hardee’s restaurants. 
• Earlier this month, large Hardee’s franchisee Summit Restaurant Holdings declared bankruptcy. The operator once had more than 145 restaurants across 14 states, but recently shut down 39 stores.
• Court documents state that a company called ARC Burger is the stalking horse bidder and is looking to spend $11.7 million to purchase between 53–73 stores, with the potential to add up to 15 more.

OFFICE

84% OF OFFICE LOANS MATURING COULD HAVE TROUBLE REFINANCING

• A total of $7.8B worth of fixed-rate CMBS loans on offices will mature this year, and Moody’s Analytics data suggests about 84% of them will face challenges when their borrowers seek to refinance.
• Office vacancy across the country hit 19% in Q1, per Moody’s, which is an almost 30-year high. Moody’s predicts office values will drop by 25%, a downward trend that will continue through the rest of the year.
• The level of defaults will be significant, there will be properties valued at half today than they were 10 years ago, and losses will be felt not only in the equity side but on the debt side.

SPECIALTY

CAR WASH CAP RATES SURPASSING OTHER NET LEASE CATEGORIES

• The car wash sector has been part of a steady rise in cap rates across the board, according to a new report by B+E. Car-wash cap rates rose by 49 basis points between the fourth quarter of 2022 and the first quarter of 2023 to sit at an average 5.77% cap rate.
• Caliber Car Wash (5.94%) and Zips Car Wash (5.81%) had the highest cap rates in their category. Auto parts (5.54% cap rate) rose by 47 bps; followed by convenience stores (5.12%) and dollar stores (6.05%), which each rose 30 bps.
• B+E showed that specialty assets such as early learning, dialysis, and urgent care saw minimal fluctuations in cap rates. These assets are less susceptible to economic downturns, pandemics, and e-commerce factors, their resilience making them an enduringly attractive option for investors.