Lender Support & Net Lease Insights: Predicting Broader Market Trends in Commercial Real Estate

US bank regulators are urging lenders to support credit-worthy borrowers in the commercial real estate market. They recommend short-term loan accommodations and accounting changes to help property owners facing challenges due to rising borrowing costs and defaults on debt. Lenders will need to navigate negotiations as $400 billion of debt matures this year. Constructive collaboration can mitigate stress and provide necessary support.

Net lease drugstores can provide insights into broader trends in the real estate market. These drugstores have common lease terms and are frequently traded across the US, making them a reliable indicator. They have flat or low-growth rent schedules and large average deal sizes, which make them susceptible to inflationary pressure and rising interest rates. Analyzing sales comps of major drugstore chains reveals trends in average cap rates, new listings, and sales volume.

Cap rates for net lease drugstores, like the broader commercial real estate market, have been trending upwards due to high inflation and rising interest rates. Despite the increase, demand for quality assets remains, and much of the cap rate inflation is driven by inferior assets. The Midwest, West, and Northeast regions experienced the highest cap rate increases, while the Southeastern states saw a decrease.

Supply and demand dynamics in the net lease drugstore sector have shifted. New on-market listings peaked in 2022, creating a supply/demand imbalance that contributed to increasing cap rates. However, since then, new listings have decreased significantly, and demand for retail pharmacies has also fallen. This decline in deal volume indicates a downward shift in net lease pharmacy demand, with a potential significant slowdown in commercial real estate sales for summer 2023.

Overall, the data suggests that cap rates will continue to rise in the commercial real estate market throughout 2023, but there is still demand for high-quality assets. The market may experience a slow summer with low deal volume, but the decrease in supply and demand could prevent significant price drops. Monitoring the net lease drugstore segment can provide early insights into market trends and help guide investment decisions in the current environment of high interest rates and inflation.

B.J. Feller and Nick O’Brien | Jun 29. (2023, June 29). Net lease drugstores provide hidden insights on broader real estate market trends. Wealth Management. https://www.wealthmanagement.com/net-lease/net-lease-drugstores-provide-hidden-insights-broader-real-estate-market-trends