Large STNL Players Wait Out Cap Rate Peak

A glut of STNL properties surged onto the market in Q3 2023, pushing the total to 3,905, a 19% increase over the 3,286 properties listed on the selling block during the second quarter.

According to a new report from B+E, the net lease brokerage, new inventory is coming in twice as fast as it’s leaving the market.

“People have debt that’s coming due or they’re concerned that cap rates are going to get worse, so they want to sell while they can,” B+E CEO Camille Renshaw told Globe St.

The third quarter saw a significant supply surge in the retail sector in big-box properties, which saw a growth of 144% accompanied by an increase in cap rates of 29 basis points. The market also is flooded with 495 pharmacies, as the major chains shut down outlets in the face of stiff competition from Walmart and Costco.

Not a lot of these STNL assets are trading, primarily because units sitting on the market for over a year are priced at unrealistically low cap rates below 5.5%; by contrast, only 27% of the properties on-market for less than a year are priced below 5.5%.

Few deals are penciling with cap rates below 5.5% because of uncertainty about the status of interest rates and cap rates. Interest rates eventually will come down, but when is the subject of much speculation.

Renshaw believes STNL cap rates, now averaging more than 7% on warehouses and more than 6% on convenience stores, are at or near their peaks.

The B+E CEO estimates that rates will be in a holding pattern for 12 to 24 months, with a possibility that interest rates will begin easing as soon as fall 2024. In tandem, the large STNL players are working with lenders to extend their window for adjusting the prices of key assets.

“Sellers with large assets of $50M or more are negotiating with their lenders and buying down some of the debt in exchange for an extension that the asset can sustain,” Renshaw said, in a telephone interview from ICSC New York.

“You don’t want to be reckless in the brief time when cap rates are potentially higher, when if you can wait another 12 to 24 months you can get the pricing you estimated when you purchased the asset,” she said.

“So, they put more cash in the deal. That’s the game that’s being played. It’s just a matter of getting your timing right,” Renshaw added.

Sale-leaseback deals are proliferating in the middle-market industrial sector, where companies with variable-rate debt are getting deals done, locking in debt at single-digit cap rates, a boon for corporate tenants.

“The same leadership team is in the driver’s seat and [sale-leaseback] puts them in a much more accretive position from a corporate debt perspective,” Renshaw said.

The B+E CEO sees an opportunity for significant rate growth in industrial leases in 2024 as demand swamps an “underbuilt” inventory of supply. A generic industrial asset like a purpose-built distribution facility is a great acquisition in this environment, she said.

Renshaw also remains enthusiastic about the car wash sector, which she compares to “QSR 15 or 20 years ago.”

“It’s changed from a mom-and-pop industry and adopted corporate best practices. You’re also seeing a really good digital model versus all-cash,” she said.