Overview

When Forged Real Estate (FRE) published their 10-Year Treasury and Historical Cap Rate Spreads report a year ago in May 2023, the 10-Year Treasury average for the month was at 3.57%. One year later in May 2024, the 10-year Treasury average for the month sits at 4.52%, an increase of 95 basis points. With the last rate hike coming in July 2023, the Fed has kept rates steady following their May 2024 meeting with the Fed Funds Rate sitting between 5.25% to 5.50%. However, from March of 2023 to July 2023, there were 3 rates hikes in addition to the 8 rate hikes in the prior year. Everyone is focused on the upcoming FOMC meeting on June 12th, but the expectation is that rates will again be held steady. Currently, the overall sentiment is still that there will likely be between one and three rate cuts by the end of the year.

In the thick of Q2 2024, we continue to see lenders not budging from their decreased max loan-to-value ratios, increased interest rates to continue to stay in line with the Fed, and tightened lending requirements. Further, many regional lenders are requiring sponsors to open large deposit accounts with those respective banks as well. As a result, net lease deals have stayed on market longer, Cap Rates have risen and there has been a continued decrease of aggressive 1031 exchange buyers due to the lack of transactions in complimentary sectors such as multifamily, shopping centers, industrial and office. In 2023, multifamily investment volume dropped to just $117.5 billion, the lowest annual volume since 2014 and a 65% decrease from its record high of $335.2 billion in 2021, with $148.9 billion in 2021 Q4 alone. The reason we are closely tracking multifamily sales volumes is that a majority of 1031 investors come from the sale of multifamily assets and exchange into more passive net lease product around the country.

In the FRE report published using data through May 2024, we analyzed a snapshot of the 10-year Treasury dating back to 2015, and then compared numerous national retail tenants and retail categories and how their single tenant, net lease deals traded over the same period. Note, for the comparables used in the report, only included were deals with 6 years and longer of primary lease term remaining, with most deals analyzed having 10+ years of primary term at the time of sale. There are varying historical spreads for each Tenant/category. Comparing the changes in trades from the trailing twelve months ending April 2024 and April 2023, Cap Rates have risen an average of fifty-four (54 bps) basis points across the nine (9) types of Tenants detailed, with AutoZone being the least volatile, only increasing twenty-one (21 bps) basis points. On the other hand, single tenant grocers saw the biggest Cap Rate rarefaction with an increase of one-hundred and eighteen (118 bps) basis points. We view this as a result of AutoZone transactions being one of the lower price point deals, which a majority are purchased as all-cash transactions, while Grocers are typically larger price points which require leverage and have been adversely impacted by financing. Further signifying how the market has been affected, the Big Box sector has seen zero trades that we were able to capture thus far in 2024 that fit into the criteria we used in our data set.

To further portray how the market has transformed over the past year and since there were significantly fewer trades occurring, we show comparable deals in this report that are currently on market as of May 2024. Using the same criteria as the sold deals, we have summarized the averages along with the number of deals considered for each of the nine (9) Tenants/categories. The data shows how the gap is closing or has already inverted between the asking Cap Rate of deals currently on-market versus what Cap Rate deals have recently sold for. In many cases, asking Cap Rates have now surpassed the recently sold comps. With a reasonable amount of inventory still on-market, the length in which these deals remain unsold has grown and continues to grow daily. Other factors that play into the change in the on-market data can be seen from the two pharmacy tenants analyzed in CVS and Walgreens, both of which hold the highest average days on-market of the tenants and categories in the report. In December of 2023, credit rating agency Moody’s downgraded Walgreens Boots Alliance, Inc. (“WBA”) to Ba2 from Baa3 and subsidiary Walgreens Co. (“WAG”) from Ba1 from Baa3, pushing Walgreens out of an investment grade credit rating. This rating adjustment was partly due to the high execution risk that Walgreens faces as it implements new strategic initiatives to reverse the sizable operating loss and accelerate the profitability at its US Healthcare segment. The current challenge of single tenant pharmacy deals is depicted in the plummeting number of trades from 2022 to 2023. When using CoStar to pull all single-tenant CVS and Walgreens trades in the United States, there were 353 trades in 2023, a 47.78% decline from the 676 trades in 2022.

On the other hand, various QSR and fast casual tenants are headlining new developments as they prove to be inflation-proof and are experiencing tremendous growth. As new development for these and other various QSR tenants continues to explode, there has been a large buildup of new development inventory on the market as the 1031 market has continued to lag as mentioned earlier. This has led to an elongated period of price discovery and a widening bid-ask gap as buyers have more supply to choose from. Buyers and sellers continue to closely monitor the Fed to see where rates are heading and to navigate the ever-evolving net lease market to determine current market pricing. Please review the attached report and reach out to the FRE team if you would like to review additional data or discuss any of these trends further.