Net Lease News

Net Lease News

February 7 – February 13, 2023

MARKET

BANKS BOOST RESERVES AT A TIME OF RECORD CRE LENDING AND A WOBBLY ECONOMY

• U.S. banks are upping their reserves in anticipation of a recession in the near future, but are still making commercial real estate loans at a higher rate than a year ago.
• In the fourth quarter of 2022, banks made about $2.4T in CRE loans, including construction and multifamily loans. That is up from $2.2T in the previous quarter and $2.1T a year earlier.
• Another reason banks have boosted their reserves is a recent change in accounting practices, The Motley Fool reports. The Financial Accounting Standards Board implemented new standards in 2020 that require banks to reserve losses on the life of loans as soon as they are on balance sheets. Thus, even if banks don’t expect credit losses immediately, they need to prepare for them, using their experience and current conditions as the basis of the loss estimates.

WE MAY BE AT THE TURNING POINT FOR RATE HIKES & INFLATION

• Investors looking for a bit of respite from inflationary pressures may find solace in Fed Chairman Jerome Powell’s recent remarks following the central bank’s February meeting.
• At a press conference in the wake of that meeting, at which the Fed announced a 25 bps increase of the overnight rate, Powell said the “disinflationary process has started” — and that means the Fed will be under less pressure going forward to increase interest rates.
• Overall, the Fed appears to have shifted its tone and outlook, which is putting downward pressure on CRE borrowing rates. The 10-Year Treasury has fallen back down to September 2022 ranges, while lenders appear to be tightening their lending spreads, which in turn is moving borrowing rates lower.

INDUSTRIAL

UBER CLOSING ALL DATA CENTERS, MOVING TO GOOGLE, ORACLE CLOUDS

• The San Francisco-based ride-hailing giant is switching from largely operating its own IT infrastructure to using cloud platforms operated by Google and Oracle. Uber signed seven-year agreements with both cloud providers, and it plans to fully migrate from its self-operated data center assets and close those facilities in the coming months. 
• The use of cloud platforms — where computing power is purchased as a service from a third party — is often less expensive than self-operated data centers and makes it far easier for a company to scale its computing resources up or down as needed. Since 2020, global spending on cloud infrastructure has grown by around 20% annually.
• Uber has kept the specifics of its owned and leased data center infrastructure close to the vest. Uber bought a Colorado data center from Microsoft in 2015.  And executives have spoken about leasing from colocation providers in multiple major markets, expressing interest in wholesale leases of entire facilities. 

MORE APPAREL RETAILERS GETTING INTO LOGISTICS BUSINESS

• It’s easy to forget that Amazon started as an online bookseller without any bricks-and-mortar warehouses.
• The e-commerce retail giant probably should be looking over its shoulder at the growing number of retail chains—all of which have been busy in the past two years building out national networks of fulfillment centers—that are taking a page out of Amazon’s strategic playbook and leveraging their warehouse footprints to offer shipping services to smaller businesses.
• The latest to join the parade is Gap, which has followed up a low-key announcement last year of its new logistics business—called GPS Platform Services—with news of a game-changing partnership with a company that, along with Amazon and FedEx, has experience running one of the busiest logistics networks in North America: UPS.
• Last year, Quiet Platforms, the logistics arm of American Eagle Outfitters, launched a nationwide delivery network that aims to give small and mid-sized retailers access to more than 40 carriers covering all US postal codes.

RETAILER BED BATH & BEYOND TO CLOSE DALLAS-AREA LOGISTICS HUB

• Bed Bath & Beyond, which just unveiled another wave of store closures, plans to close one of its distribution facilities in the Dallas area in a move expected to leave hundreds of employees without their jobs and the troubled retailer without one of its major U.S. e-commerce hubs.
• The closure of the facility in Lewisville comes as the financially troubled retailer is weighing its future. In a recent filing with the Securities and Exchange Commission the company said it would not only reduce its store footprint, but it would also reduce “related distribution centers.”
• On top of closing the Dallas-area distribution hub, Bed Bath & Beyond also plans to close four stores in Texas. The additional store closings brings the total planned closures by the retailer to nearly 300 U.S. stores.

RETAIL

KROGER, ALBERTSONS COULD SELL 300 STORES FOR $1B AS FTC SCRUTINIZES MERGER

• Grocery store giants Kroger Co. and Albertsons Cos. are planning to sell as many as 300 stores ahead of their planned merger. The stores could command as much as $1B, and would be concentrated in regions where the two companies both have locations.
• Kroger announced in October that it would acquire Albertsons for $24.6B, or about $34.10 per share. The two were already the largest two supermarket chains in the country, and combined they would operate nearly 5,000 stores nationwide.
• The move to sell locations is apparently to allay antitrust concerns about the merger. In a lawsuit filed early in February, 25 U.S. consumers argued the merger would allow the combined entity to control 36% of the U.S. grocery store industry by sales, which, it argued, would be deleterious to consumers.

CVS CLOSES IN ON $10.5B DEAL TO ACQUIRE OAK STREET HEALTH

• The company is finalizing negotiations with Oak Street Health to acquire the company for roughly $39 per share. The move, which follows the company’s $8B purchase of home-care provider Signify Health in September, would drastically expand its primary care business.
• A nationwide shortage of primary care doctors has prompted pharmacy chains to expand their healthcare offerings. In late 2021, Walgreens announced it would spend $5.2B opening 600 Village Medical clinics by 2025 and 1,000 by 2027.
• Some ventures have been more successful than others. Amazon ended its telehealth service, Amazon Care, at the close of last year, claiming it wasn’t a sustainable long-term solution for enterprise customers. 

CANADA GOOSE DOUBLES DOWN ON RETAIL FOOTPRINT

• Canada Goose Holdings, a Canadian holding company of winter clothing manufacturers, is planning to double the number of its outlets in the next five years, aiming to increase its bricks-and-mortar footprint to more than 100 stores globally.
• In addition to nine existing US stores, the company will be opening new stores in Seattle, Los Angeles and Las Vegas in Q1 2024.
• The Toronto-based firm, which specializes in luxury items including goose down coats, says it currently does not have plans to open stores in Texas, Florida and Virginia, where it has seen strong e-commerce activity, but will continue to expand in the Western US.

DEMAND FOR NECESSITY RETAIL WILL BOOST STNL IN 2023

• The outlook for the single-tenant net lease sector remains strong going forward as household demand for necessity retail shows resiliency and retail sales data shows consumers are continuing to pour cash into categories like groceries, personal care and wellness items.
• As 2023 began, availability in the STNL sector was “historically tight” after an eight-quarter stretch that saw tenants absorb more than 100 million square feet. Researchers say “widespread demand” exists among grocers, drug stores and low-cost restaurant chains. But the approximately 8.8 million square feet of single-tenant space underway at the onset of 2023 equated to just 0.1 percent of existing stock.
• Restrained development indicates single-tenant availability may hold firm or compress over the near term if additional vendors grow their businesses and backfill available space.