May 2023 The healthcare sector is by no means immune to changing economic conditions, but among commercial real estate investors, medical facilities continue to be among the most popular and desirable investments. An aging U.S. population has driven demand for all types of healthcare properties – from more traditional medical office buildings, physicians’ offices and urgent care facilities, to highly specialized properties including behavioral health, post-acute care facilities and micro-hospitals. But as healthcare facilities become more specialized, we’ve seen buyers become more specialized as well. Healthcare Specialty Assets: Investment Sales Volume Some healthcare and medical investors see value in acquiring assets with high acuity uses and expensive finishes and build-outs. High revenue potential and replacement costs for these properties provide investors with certainty of continued use by the tenant. Other investors have become focused on properties leased to health systems and see an opportunity to foster relationships with their tenants for long-term success. Still other investor groups recognize that high construction costs have created opportunities to acquire value-add facilities, including second generation medical office buildings that are ripe for renovation or redevelopment. Regardless of an investor’s chosen lane of specialization, ever increasing demand from consumers will continue to drive the need for new healthcare facilities, creating more and more opportunities for investors to enter the sector or add to their existing portfolios. Healthcare development is occurring throughout the U.S., as consumer demand can be found across all regions and in markets of all sizes. Unsurprisingly, the state of Florida currently leads the nation in new healthcare development. With more than 21 percent of the population over age 65, demand from retirees and aging Americans are keeping developers busy. As these new developments come online, they’re capturing the attention of a variety of buyer groups. While REITs and institutional investors have historically been quite active in the sector, changing market dynamics have caused these buyers to become less competitive over time. The desire to acquire healthcare assets remains strong, but with more buyers now active in the sector, the available supply of properties is not enough to meet investor demand. Private equity funds, family trusts and individual investors have come to appreciate the stability and increasing demand forecasted for the sector, and REITs and institutions are simply being outbid by buyers with access to low-cost capital and a strong appetite for the product. As a result of this demand, we have seen the single-tenant healthcare sector grow in annual transaction volume, demonstrating a nearly 150 percent increase in the last ten years. Looking ahead, however, the gap between buyer and seller expectations will cause transaction volume to decline, and activity is expected to be suppressed for at least the next 12 months. The ability to sell at unprecedented pricing is likely a thing of the past and is no longer a primary motivation for owners. Instead, in the next 18 to 36 months, conditions motivating a sale should center around debt maturity and the need to refinance. In today’s environment, sellers will need to price their assets for today’s buyers or risk chasing the market, while buyers shouldn’t ignore good fundamentals. As buyers and sellers see-saw their way closer to alignment on pricing in the coming quarters, the market can expect to see activity resume, although the lack of supply could be problematic for some time given anticipated demand.

April witnessed ongoing stress among the regional banks as concerns have moved from unrealized losses in bank securities and the flight of uninsured deposits to the quality of loans on bank balance sheets and implications of the ongoing tightening of lending standards. Although there has been no immediate plunge in economic activity associated with the banking failures of the past two months, activity has continued to slow. Nevertheless, the Fed raised interest rates by 0.25 percent at their May 3 meeting and promised to keep rates elevated through the end of the year. Markets, however, have a different take on the expected path of interest rates. Inflation The inflation picture continued its slow but steady improvement with the release of the March CPI report. Headline inflation increased only 0.1 percent month-over-month, and the year-over-year reading fell to 5.0 percent from the 6.0 percent year-over-year reading in February. Contributing to the soft reading in March, we saw year-over-year energy prices turn negative – it’s been a year since Russia invaded Ukraine causing energy prices to spike – and grocery prices eased for the first time in many months. Shelter inflation (rents) also eased, and this is expected to continue. Core CPI, excluding energy and food, increased 0.4 percent month-over-month and the year-over-year figure increased to 5.6 percent, a 10-basis point increase from February. The Fed’s preferred measure of inflation – Core Personal Consumption Expenditures – showed a slight improvement to 4.6 percent year-over-year. Improvement in inflation is expected to continue, but the rate of improvement appears to be slowing and measures of inflation remain stubbornly above the Fed’s 2.0 percent target. Consumer Spending, Manufacturing & GDP Retail sales fell 1.0 percent in March, while overall personal consumption expenditures were flat. After starting the year with strong readings in both measures, it is apparent that the unseasonably warm weather in January was a major factor for the early strength. Consumer spending has been slowing since the beginning of the year, and when adjusted for inflation, year-over-year retail sales are down 4.0 percent. The Leading Economic Indicators declined for the twelfth consecutive month and continue to indicate an upcoming contraction in the economy. The ISM manufacturing index for April showed a slight improvement but remains at a level that indicates contraction in the manufacturing sector. There was a corresponding report showing that Nondefense Capital Goods Orders, excluding aircrafts, were down again in March and have been down in five out of the last seven months. Rising interest rates and tighter lending standards are most often mentioned as the reason for the slowing. The first reading of Real GDP in the first quarter indicated that the economy grew at a disappointing 1.1 percent annualized rate, down from the 2.6 percent annualized rate for the fourth quarter of 2022. Productivity in first quarter 2023 declined at a 2.7 percent annualized rate while unit labor costs grew at a 6.3 percent annualized rate. Employment & The Labor Market The employment report for April showed a strong 253,000 gain in jobs. That was offset by large reductions in the previous two months, and a total of 149,000 job gains in February and March were removed through revisions. The three-month average gain in payrolls is now down to 222,000 – the lowest number since January 2021. In another sign that the labor market is softening, JOLTS (the Job Openings and Labor Turnover Survey) reported that job openings are down 20 percent year-over-year. Employers are not as aggressive in looking for new workers, but they have not started broad-based layoffs either. Instead, they are reducing the average hours worked. The unemployment rate dropped to 3.4 percent from 3.5 percent, but the average work week is now only 34.4 hours – the lowest level since April 2020. Average hourly wages increased 0.5 percent, which is the most since July 2022, bringing the year-over-year figure to 4.4 percent from 4.3 percent. The Fed’s favorite measure of wages, salaries and benefits – the Employment Cost Index – rose 4.9 percent year-over-year through March. Although wage growth is elevated, the average weekly earnings on an inflation adjusted basis are down 1.6 percent year-over-year and have been trailing inflation for the last two years. This is a predominant reason that consumer expenditures for non-discretionary items have been slowing. Interest Rates & The Fed Finally, the Fed held their scheduled Federal Open Market Committee (FOMC) meeting on May 2-3. The target range for the Fed Funds rate was increased by 0.25 percent to 5.00-5.25 percent. It is expected that this is the last increase in the Fed Funds rate for this tightening cycle. Chair Powell acknowledged that the potential impact of the banking crisis may effectively have the same impact on credit conditions, as would further increases in the Fed Funds rate, and he reiterated that the Fed intends to keep rates at least at this level through the end of the year. The most recently released Senior Loan Officer Survey indicated that banks are continuing to tighten their lending standards – a process that began in third quarter 2022. The survey also indicated that demand for loans in all categories, except credit cards, was declining. So, we have a contraction in both the supply and demand for credit – a definite recipe for a slowing economy going forward. Despite Powell’s rhetoric, markets are expecting a recession to commence that will drag down inflation more quickly than the Fed’s forecast. Consequently, three interest rate reductions by the end of the year are currently anticipated by the markets, beginning as soon as the September 19-20 FOMC meeting.    

The past month has seen further slowing in most economic activity reports. Inflation is improving but is still elevated, and there is ongoing evaluation of the fallout from the collapses of Silicon Valley Bank and Signature Bank that occurred in the first part of March. The quick responses by the Fed, the FDIC, and the Treasury have, for the time being, helped ease the panic that ensued following the bank failures. The Fed’s job has become more challenging, however, as it now must address both inflation concerns and bank solvency matters. The stress in the banking sector will only increase the tightening of credit conditions that had started even before Silicon Valley Bank and Signature Bank failed. Lending standards for commercial and industrial loans, and commercial real estate loans had already tightened to levels that historically were associated with economic contractions. The impact is likely to be most evident in small and midsize banks as they hold nearly 70 percent of all commercial real estate loans. This is important to monitor as these are the banks that play an important role in the financing of small businesses. The next few months will provide better color as credit tightening impacts everything from capital spending plans to labor demand Consumer Metrics  Looking at recent reports, the Consumer Price Index for February was released just days after the onset of the banking crisis. Although the year-over-year rate of headline inflation is improving – dropping from 6.4 percent in January to 6.0 percent in February – the core inflation index, which strips out food and energy prices, recorded a stronger than expected monthly reading resulting in the year-over-year core CPI only falling from 5.6 percent in January to 5.5 percent in February. The inflation situation was further complicated recently by OPEC’s announcement on April 3 to cut oil production by 1.2 million barrels per day. Improvement in inflation is expected to continue, but the rate of improvement appears to be slowing, and measures of inflation remain stubbornly above the Fed’s 2.0 percent target. Both retail sales and overall personal consumption expenditures in February eased from their strong January readings that were attributed to the unseasonably warm weather at the start of the year. Consumers have become more price conscious but are still willing to spend. Leading Economic Indicators have now declined for 11 consecutive months and continue to forecast a slowing in the economy. Such a string of declining readings has always been an indication of an existing or upcoming contraction in the economy. The ISM manufacturing survey index for March fell to a new low for this cycle. It has indicated contraction in the manufacturing sector for five consecutive months driven by seven consecutive months of contracting new orders and a declining order backlog. This survey also recorded a three-year low in its employment index. The Labor Market  March’s establishment employment report showed the smallest monthly gain since December 2020 with non-farm payrolls increasing by 236,000. The average weekly hours worked is at the lowest level of the past year, and year-over-year average hourly earnings growth is at 4.2 percent – the slowest since June 2021. Additionally, the jobs opening report, released prior to the employment report, showed another drop in job openings suggesting that labor market conditions are loosening. There are now 1.67 job openings for every unemployed worker, which is the lowest ratio in 15 months. Providing a different view of the jobs market, the household survey – which is used to calculate the unemployment rate – saw a stronger increase in jobs of 577,000 with the labor force increasing by 480,000. This resulted in the unemployment rate declining to 3.5 percent from 3.6 percent in February. In short, the labor market continues to be the most resilient part of the economy, even as some metrics indicate some easing in the demand for labor. Interest Rates & The Fed Amid everything else in March, the Fed held their scheduled Federal Open Market Committee (FOMC) meeting on March 21 and 22. The target range for the Fed Funds rate was increased by 0.25 percent to 4.75 to 5.00 percent. Taken by themselves, the current elevated inflation readings would likely keep the Fed on a clear path of increasing interest rates, but following the meeting, Chair Powell acknowledged that the potential impact of the banking crisis may effectively have the same impact on credit conditions as would increases in the Fed Funds rate. Consequently, the official statement from the Fed said, “some additional policy firming may be appropriate.” Powell also said that no members of the FOMC saw interest rate cuts as likely this year. Despite Powell’s rhetoric, market expectations are now looking for possibly one more increase of 0.25 percent at the May 2 and 3 FOMC meeting, with two or three interest rate reductions by the end of the year, which could begin as early as the mid-September FOMC meeting.

Summary of future growth plans for the top 100 retailers, as selected by brand recognition, expansion rate and frequency of investment sale transactions Average cap rate and sale price information for the most commonly traded retailers Credit rating summary with parent company information Average square footage ranges and store counts for each tenant

Just as investors were debating whether the Fed would raise rates by 25 basis points (bps) or 50 bps at their upcoming meeting on March 21–22, financial markets were surprised by the second largest bank failure in U.S. history. The collapse of SVB Financial Group ($215 billion in assets) on March 10 and the subsequent failure of Signature Bank ($110 billion) are the first significant indications that the rapid tightening of monetary policy over the past year is impacting business as usual in at least part of the financial sector.  Expectations for the path of Fed Funds have sharply declined since the failure of SVB. Last week, the futures market indicated an increase of 0.75% in Fed Funds by the end of summer, resulting in a peak of 5.5%. As of mid-March, a 0.25% increase is all that is expected, followed by declines of 0.75% to 1.0%  by the end of the year.  The decline in interest rate expectations has occurred despite the fact that fundamental economic data has shown stronger than expected reports for inflation, consumer spending, and employment since the beginning of 2023. Until the unexpected bank failures, the stronger economic data had only solidified the Fed’s concern that price pressures may be more persistent than forecast and, consequently, expectations for interest rate actions by the Fed had moved higher.  Consumer Metrics  Starting with the Consumer Price Index (CPI) report for January, all major inflation gauges showed that the rate of improvement in the inflation rate was slowing. CPI was up 0.5% enabling the year-over-year calculation to tick down from 6.5% in December to 6.4% in January. The Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure Index, rose 0.6% in January, resulting in the year-over-year figure rising from 4.6% to 4.7%. Inflation has moderated since peaking last summer but remains well above the Fed’s target of 2.0%. The CPI report for February, released on March 14, will be a critical component in determining the Fed’s next interest rate move at their March 21-22 meeting.  Monthly retail sales in January advanced at the fastest rate since March 2021, up 3.0%. This strength followed two months of negative sales growth in November and December. While partly attributable to warmer than normal weather, the strength showed that the consumer still has the ability and willingness to spend at a brisk pace. There are, however, many reports of consumers becoming more price conscious and moving from top-of-the-line brands to generic brands.  The Leading Economic Indicators (LEI) index continues to portend a weakening economy with a recession highly likely. The LEI is now down to the level last seen two years ago in February 2021. Year-over-year, LEI is down 5.9% – a level that has always been associated with a recession.  The quarterly survey of Senior Loan Officers at commercial banks indicated that lending standards have been tightened to levels only seen in recessionary periods over the past 25 years. Banks are concerned about rising loan defaults, weakening collateral valuations, and general economic uncertainty. The same survey also indicated that loan demand has decreased across all major categories of loans. The SVB and Signature failures will likely keep the tightening of lending standards in place for some time.  Employment Trends and the Labor Market  As has been the case for the past year, the labor market continues to be the one leg of the economy that has yet to buckle under the tightening monetary policy of the Fed. The February employment report showed payrolls increasing by 311,000 – a strong follow up to the 504,000 gain in January. While the headline numbers indicate ongoing resiliency, a closer look at the numbers indicate some potential developing softness in the labor market. The unemployment rate increased from 3.4% to 3.6% as the number of new jobs didn’t keep up with the increase in the size of the workforce. The average weekly hours worked eased to 34.5 from a downwardly revised 34.6. Average hourly wages increased 0.2% month-over-month – the weakest monthly reading since last February – however, year-over-year wage growth still remains unacceptably high for the Fed at 4.6%.  A Deeper Look at Recent Bank Issues Simply stated, the SVB and Signature problems were a result of depositors requesting withdrawals that exceeded the banks’ liquid assets. To generate more liquidity, the banks had to sell securities – mainly in the form of bonds – which had declined in value over the past year as interest rates increased (higher interest rates mean lower bond prices). The sale of these securities generated losses causing the banks to become insolvent, as liabilities became greater than assets.  To shore up confidence among depositors at U.S. banks, the Fed, FDIC, and the Treasury Department announced on Sunday, March 12 that all depositors at the defaulting banks would be made whole. Additionally, the Fed introduced a new lending facility to make loans of up to 12 months to banks that run into liquidity problems.  Finally, Fed commentary after the March 22 meeting will be closely scrutinized in light of the SVB and Signature bank failures. Investors will want to see if bank liquidity issues force the Fed to pause their tightening campaign earlier than expected. In Chairman Powell’s semiannual monetary policy report to Congress on March 8, he made it clear that although inflation has been moderating, “the process of getting inflation back to 2.0% has a long way to go and is likely to be bumpy.” The failure of SVB presents another challenge for the Fed to incorporate in executing their monetary policy but is not likely to cause any change in the Fed’s focus of bringing down inflation.  As Powell stated, “restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time. The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.” 

Coming off the heels of the commercial real estate conference season, the industry seems to have arrived at a consensus: opportunities are available for those willing to search for them and that search may be getting a little bit easier. The expectation is for more clarity from the Fed as the spring progresses, and accordingly, we anticipate that from summer until the end of the year, we will see strong transaction volume.  Retail lending becoming attractive  One of the key takeaways from recent conversations generated with lenders was that nearly all of them are actively seeking retail loan opportunities. Improved indicators, such as occupancy and overall rent, have resulted in more favorable underwriting in the sector. The improved conditions are a result of limited construction in certain markets coming online in the last five years. This has made the environment more palatable for life company lenders to re-enter the space, and also allow for strong execution with commercial banks, credit unions, and conduits.  Adaptive reuse has emerged as an in-demand space. Conversions to mixed-use, lifestyle, and fulfillment centers have resulted in maximization of a retail asset’s value and best use. This translates to more institutional equity providers willing to assist developers in capitalizing on these opportunities. The retail sector does have its headwinds, however, with two consecutive quarters of declining activity noted in the single-tenant net lease sector, as well as a similar pull-back in multi-tenant retail.  Multifamily remains in demand  For the past decade, one of the safest bets in commercial real estate has been multifamily, and that doesn’t seem to be changing any time soon. The best spreads for the multifamily asset class continues to be delivered by agency and “heavy-mission” orientated projects. The arena remains dominated by the agency lenders, but we have seen the popularization of long-term take-out financing by life company businesses. High housing demand doesn’t show any signs of subsiding, so this stalwart of the industry should remain king for the foreseeable future. For multifamily, lenders across the board have significant capital to deploy and are expected to compress spreads, thanks to aggressive underwriting, in an effort to generate more activity.  During the recent National Multifamily Housing Council (NMHC) event, Freddie Mac noted an increase in activity, thanks in part to the massive success of their 5-year fixed rate product with flexible prepay. This product also allows them to achieve higher interest-only levels versus when they had been previously constrained by the shorter loan term. The 5-year fixed rate product also offers a strong alternative to a bridge loan for a borrower.  At the same conference, pipeline building was the consensus from Fannie Mae, where volume has been slower year-to-date than in previous years. Borrowers can benefit from Fannie’s aggressive stance on longer term business (10+ years) and 5-year term options. The agency also communicated an appetite for credit facilities, a possibly unpassable consideration from the right type of borrower. Both Fannie and Freddie reported strong new deal inflows, with a tick-up of conversion expected after an anticipated drop in the 10-year treasury.  Other lending sources are available for specific situations and conditions. Life companies have been aggressive on spread reduction, banks are offering attractive terms for developers seeking construction loans, and equity remains available, especially preferred equity, when proceeds are falling short in a refinance. Additionally, bridge spreads have seen a significant drop in the early part of February, with some exceptions among banks.  Update from the Federal Reserve  We saw the Federal Reserve raise the Fed Funds policy rate by 25 basis points to between 4.50 percent and 4.75 percent during the February 1 meeting. While this was a smaller increase than the 50-point increase seen in December, it is now clear that ongoing increases would still be required to meet their mandate of price stability. The good news is that weakening demand exerted downward pressure on inflation in the previous quarter, making the possibility of this mandate being realized sooner rather than later a real possibility. But as the data changes, we can be sure that the story has not yet been written in terms of next steps.  While the question of “How long will rates continue to elevate and then level-off before rate cutting is initiated?” remains to-be-determined, it is clear the Fed actions will determine the course of the economy during the next one to two years. As a financier, setting a benchmark for rates has been the biggest hurdle due to increased cost of capital which has exasperated by limited clarity around monetary policy. Once uncertainty is eliminated, executions will increase.  As always, the best possible outcome can only truly be achieved by a full understanding of the entire capital stack, especially when pricing and discovery-related questions abound. We see the dilemma of “wait or act now” playing out in real time with borrowers, and the best way to navigate this quandary is to research all available lending options. The opportunities are there, but not as low hanging as they once were. 

As populations grow and America’s baby-boomer population ages, drugstore chains like CVS Pharmacy and Walgreens are, not surprisingly, investing significantly in the healthcare industry. But now, even general consumer retailers are beginning to expand their brick and mortar presence with new and bigger stakes in the primary healthcare market, which is opening the doors for net lease investors.  In recent months, several notable acquisitions have been announced. Signify Healthcare, a provider of home healthcare, will be acquired by CVS Pharmacy for close to $10.8 billion, according to February reports. Summit Health, the parent company of urgent care chain CityMD, is being acquired by Walgreens through an $8.9 billion deal. And in a bid to outpace rivals and increase its physical presence in primary care, CVS Health has agreed to pay approximately $10.6 billion to acquire Oak Street Health, the owner of over 170 senior-focused medical facilities.  Additionally, both retail juggernaut Walmart and e-commerce powerhouse Amazon are expanding into primary care. Amazon said last summer that it will pay almost $4.0 billion to acquire 1Lifecare Health, a primary care business that runs as One Medical, which is a turnkey network of 188 primary care clinics throughout the United States.  In an effort to compete with retail pharmacies and other merchants, Dollar General is now stepping up its offering of healthcare services too. At three of its stores in Tennessee, the business is testing the concept of mobile health clinics to offer consumers access to basic, preventative, and urgent care services, as well as lab testing. In order to offer these medical services – which are set up in sizable vans in shop parking lots – the discount retailer partnered with DocGo, a company that offers mobile health and transportation services. According to executives, the company intends to assess customer feedback and decide whether it would be feasible to offer the mobile health clinic service in more stores.  Walmart Health is preparing for its upcoming growth too. The retail behemoth recently announced that it will establish 16 more health facilities in Florida, concentrating on the Jacksonville, Orlando, and Tampa markets. According to the business, the locations should be operational by the fall of 2023.  After establishing a presence in Arkansas, Georgia, Illinois, and Texas, Walmart Health entered the Florida market in early 2022. Thus far, these efforts have resulted in enhanced patient satisfaction and shortened wait times. The Florida health centers are reporting wait times that are almost half the national average. The clinics offer a variety of services, such as primary care, laboratories, X-rays, dental treatment, behavioral health care, hearing care, select specialist care, and community health services. They are situated near or adjacent to Walmart's retail stores.  There is growing interest from commercial real estate investors who have traditionally been narrowly focused on either retail or medical assets. As established, strong-credit retailers expand further into the rapidly growing healthcare sector, investors will see increased opportunities to acquire newly built, well located healthcare assets in desirable markets. 

End of the year reports released in January showed an economy with little momentum going into the new year. A few of the early reports for January, however, suggest the economy is starting 2023 better than expected. The question is, how long will it last? The Fed’s efforts to slow down demand are bearing fruit. Most supply bottlenecks are easing as well, leading to a better balance between supply and demand that will enable inflationary pressures to continue to ease in 2023. Although inflation is slowing, the Fed is not convinced that price pressures are on a sustainable downward path and consequently has indicated that more rate increases are on the horizon.  Consumer Metrics  The December Consumer Price Index (CPI) showed year-over-year inflation at 6.5% and the year-over-year figure has now declined for six consecutive months after peaking at 9.1% in June. Additionally, on a month-to-month basis, the December reading declined for the first time since May 2020. The core CPI (excluding food and energy) eased on a year-over-year basis to 5.7%. The Producer Price Index (PPI), which provides an indication of pipeline pricing pressures, also fell in December by 0.5% – the sharpest monthly decline since April 2020. The disinflationary trend is likely to continue as the slowdown in shelter inflation will begin to register in early 2023. Nevertheless, despite the improving trend in inflation, the absolute numbers remain well above the Fed’s inflation target of 2.0%.  Retail sales fell 1.1% in December after declining 1.0% in November. Sales have declined three of the last four months and are now at the lowest level since May. Consumers are pushing back on higher prices forcing retailers to offer more discounts and promotions in order to clear inventories.  In addition to the contraction in retail sales, industrial production fell 0.8% in December following a downwardly revised decline in November of 0.6%. Housing starts were down 1.4% in December following a 1.8% decline in November. As stated earlier, the economy was clearly losing momentum heading into 2023.  Concern about the slowing economy was demonstrated in earnings reports from the big banks. The big six banks reported that $7.2 billion has been set aside for loan loss provisions – the most since Q2 2020. 

Market data, charts & graphs: current and historical trends for single-tenant office, industrial and retail properties, as well as multi-tenant retail Overall market trends Market summary & analysis Economic data points The overall single-tenant net lease market posted its third strongest year in history, with approximately $77.6 billion in sales volume. A strong start to the year, as 2021’s momentum carried over to first quarter 2022, allowed the market to perform as well as it did annually, but recent quarterly activity tells a different story. Influencing factors, like inflation and rising interest rates, have seemingly caught up with investors and sales volume has slowed considerably. In fact, the single-tenant net lease market has now reported four consecutive quarters of declining activity and quarterly totals are down 66 percent year-over-year. The fourth quarter comparison is perhaps overly dramatic due to last year’s record-setting final quarter, but looking forward, it’s likely that we’ll continue to see lower levels of sales volume in the coming quarters rather than a return to near-record highs. There is currently enough uncertainty in the market that some investors may choose to observe from the sidelines, taking a more cautious approach. Alternatively, as pricing trends shake out, investors seeking higher yields may find new opportunities. There is no expectation that investment activity across the single-tenant net lease market will grind to a halt, but the market should be prepared to see conservative activity levels in at least the first half of 2023. Past the mid-year point, demand will be influenced by economic conditions – especially if we enter a recession – interest rate levels, supply/demand dynamics, and the willingness of sellers to correctly price new-to-market assets. An imbalance with any one of these influences could impact overall demand levels for 2023 and beyond.   The multi-tenant retail sector has also witnessed a reduction in activity levels, particularly during the second half of 2022. After a strong fourth quarter 2021, and a second quarter 2022 that was recorded as the third strongest period in history, the sector began seeing a pullback in transaction volume that mirrored the rest of the market. In fact, despite being on pace to have a record-setting year, fourth quarter activity slowed so significantly that we ended 2022 as only the fourth strongest year in history, instead of potentially the first. Multi-tenant retail cap rates jumped by 10 basis points in the final quarter of the year, sitting now at 6.78 percent. This is the highest average cap rate reported in a year, and while it’s likely the start of additional upward movement, cap rate increases are not expected to be dramatic in the next few quarters.    

Summary of future growth plans for the top 100 retailers, as selected by brand recognition, expansion rate and frequency of investment sale transactions Average cap rate and sale price information for the most commonly traded retailers Credit rating summary with parent company information Average square footage ranges and store counts for each tenant

For investors evaluating a shopping center purchase, the anchor tenant can make or break the deal. Although grocery stores and big-box retailers have traditionally topped the list of ideal anchors to help draw customers to retail centers, another worthy option deserves investor attention: fitness centers.   When we think of traditional anchors in multi-tenant retail, names like Walmart, Target, Hobby Lobby, T.J. Maxx, most grocery stores, and other big box retailers come to mind. While gyms may not check all the same boxes as traditional anchors, over the last several decades they have emerged as resilient tenants that bring steady traffic to neighboring retailers and a great investment.  Resiliency  When retailers shut down at the beginning of the pandemic, fitness centers were among the first places to empty—and many of the small, local gyms stayed that way. However, the large fitness chains like Planet Fitness demonstrated that even a global crisis would not stop them. Almost as soon as they opened their doors again, Planet Fitness operators began repaying rent deferments, often ahead of schedule, putting themselves right back on their pre-pandemic trajectory.  Fitness buffs made do with home equipment, outdoor runs and streaming workouts during the pandemic, but many missed the community of their local gym. By second quarter 2022, gym patrons returned in force, leading to a 15.9 percent increase in fitness visits compared to second quarter 2019 according to retail traffic data firm, Placer.ai.  Health and Wellness is Here to Stay  In recent years, scientific data has continued to demonstrate the physical, mental and emotional benefits of exercise—and Americans are paying attention. According to IBISWorld, over the last five years the number of gym, health and fitness clubs in the U.S. has grown an overage of 2.7 percent annually, reaching more than 112,000 locations in 2022.  While attaining a beach body may have been the ultimate goal of exercise a decade ago, the top two reasons that Americans work out today are to reduce stress and feel better mentally. Big fitness brands are adapting with more wellness services, stress-busting workouts and community events. Some are even adding new services like hydro massages and cryotherapy, creating even more incentives for members to make regular visits.   Additionally, a heightened focus on mental health has opened eyes to the social benefits of exercise. Gymgoers appreciate the opportunity to mingle with like-minded people multiple days a week.   Steady Foot Traffic  Unlike grocery and big-box retail patrons, fitness center members typically make several visits in one week—sometimes even daily. Moreover, they tend to linger. After a long workout, a member may stop by the café next door to pick up an iced coffee or smoothie or grab a quick dinner at a nearby restaurant. In family-friendly shopping centers, parents might bring their children to a neighboring trampoline park after they’ve been cooped up in the gym’s kids club for an hour or two.   The data backs up these anecdotes. Analysis of cellular tracking data shows that one popular fitness location had 572,000 visits in a single month from people who made at least 10 visits that month—compared to 191,000 visits to a traditional AAA credit retail anchor. The fitness market outlook is bright as consumers increasingly prioritize self-care, wellness and community engagement. As consumers once again fit gym visits into their schedules, it’s time to consider whether fitness-anchored retail fits into your portfolio. While every investment is unique, a highly trafficked, loyalty-based tenant can have a significant influence on a shopping center’s overall synergy and long-term success. As you begin to evaluate fitness-anchored centers, consider the following general tips: To download a copy of this report, please provide the following information: hbspt.forms.create({ region: "na1", portalId: "7279330", formId: "4e6713d2-ff33-454c-94f7-b3a2c5036179" });  

The U.S. economy reported gross domestic product (GDP) annualized growth of 2.6 percent in the third quarter, thereby avoiding a third consecutive quarter of negative growth.  This positive news can be easily tempered by the fact that the growth was greatly affected by trade and inventory numbers, which were skewed as a result of world events like the war in Ukraine. But the news of growth was welcomed in an economy that has been starved for something positive for most of the year.  Compounding the economic caution in the absence of sustained economic growth, of course, is the strain that inflation has inflicted on all Americans. In response to 40-year inflationary highs, the Federal Reserve has been forced to react with its primary inflation-countering tool: increasing interest rates. In early November, the Fed raised short-term rates to the highest level since January 2008. Additional rate hikes are anticipated in December, although signals suggest we’ll see increases in smaller increments going forward.  Still, amid all the turmoil and uncertainty, several quick service restaurant (QSR) operators continue to roll-out expansion plans and report better-than-expected sales and earnings.  Restaurant Brands International (NYSE: QSR) recently reported third quarter revenue numbers that exceeded expectations. With same store sales growth from their Burger King, Popeyes, Tim Hortons and Firehouse Subs brands, the company’s profitability also came in higher than expected.  At the same time, Yum Brands (NYSE: YUM) also reported same store sales for its Taco Bell and KFC stores that were higher than anticipated, citing popularity for its “premium” menu items with consumers. McDonald’s (NYSE: MCD) also recently reported an increase in same store sales, pointing to a strong consumer appetite for budget fast food versus more expensive dining options.  As a result of the sustained strength of the brands like the ones mentioned here, as well as others, QSRs continue to be a very popular option for many net lease investors looking for conservative and predictable investments in the $1 to $4 million price range.  As an illustration of this current level of investment demand and pricing, we recently represented a client in the acquisition of a newly constructed Burger King that had relocated to a Philadelphia suburb of New Jersey. With a guarantee from a 29-unit franchisee, the triple net lease had nearly 20 years of initial term remaining with rental increases every five years. The all-cash buyer used the acquisition as a 1031 exchange replacement property and at approximately $3 million, the acquisition cap rate was in the mid 5-percent range.  A different 1031 exchange client, that required a conservative level of financing, is now under contract with another Pennsylvania Burger King that has over 20 years of initial term remaining. The lease is guaranteed by Carrols Restaurant Group – Burger King’s largest franchisee with over 1,000 locations – and also has regular rental increases.  "Amid all the turmoil and uncertainty, several quick service restaurant operators continue to roll-out expansion plans and report better-than-expected sales and earnings." Across the Northeast region, real estate investors seeking QSR assets will see supply continue to rise as more and more brands target the region for expansion and growth. Bojangles, for example, has announced long-term plans to open nearly 50 locations over the next seven years and will enter the New Jersey market for the first time. Panda Express and Krystal have also identified New Jersey as a target growth market, while Rhode Island is on the map for Checkers and Rally’s. Dunkin’ has opened new stores in Pennsylvania in recent months, while Sonic has grown in Connecticut.  Investors pursuing stable cash flow investments should consider opportunities across the region. Those moving equity through 1031 exchanges toward single-tenant net lease assets realize these are reliable investments that hold value with little to no management involvement. For these reasons, growth across the QSR sector will provide a variety of attractive investments for buyers to consider.  To download a copy of this report, please provide the following information: hbspt.forms.create({ region: "na1", portalId: "7279330", formId: "58a01bd1-def8-4a08-8b75-43f2c726ccb5" });