upward trend written on white board_shutterstock_1745636096 800x315

You might know that Sound of Music sing-a-longs are a thing in live theater and online. You can bet that one of the favorites is Climb Every Mountain. If only triple net lease could step out of the spotlight.

Unfortunately, the sector seems to be providing encore performances as average closing cap rates keep their upward inclination, according to the Lomuto Report out of Northmarq.

“[The] indicators are saying we’re probably not done with rising cap rates just yet,” Chris Lomuto wrote. “Lots of existing inventory to burn off, maturing loans that may be difficult to roll over, developers needing to recycle capital, tight spreads, and a dearth of 1031 buyers. These are not traditionally a recipe for stable or falling cap rates.”

The mechanisms at work seem clear. In short, there’s more supply and less demand, squeezing out the value owners can claim and lowering the willingness of buyers to pay higher prices. As long as the conditions continue, there’s upward pressure on closing cap rates.

Though Lomuto notes some trends that could eventually head things off and restore a more dynamic market. For example, the average asking cap rate trend for all NNN started to rise in May 2022, when they were about 5.25%. With some minor ups and downs, it’s continued to rise and has gained roughly 100 basis points to 6.25%. Owners are recognizing that they can no longer expect as much as they could have in the near past when markets were at a high and the full impact of higher interest rates hadn’t yet been felt.

With the rise in asking cap rates had been compression of the gap between them and benchmark yields from, in the case of the federal funds rate, 587 basis points in January 2021 to 91 basis points in December 2023. The gap to the 10-year Treasury had been 488 basis points in that same January and now are 222. The S&P 500 earnings were spaced out by 295 and now that gap is 239. All in all, the biggest gap is within under 240 basis points.

Where things can get a little odd is looking at cap rates by product type. Lomuto shows a number of categories: auto and car wash, convenience and gas, dollar stores, grocery, industrial, office, pharmacy, and QSR. Measured from peak pricing, pharmacy is up by only 75 basis points (he points out that issues with Rite Aid and Walgreens should have had more effect). Grocery, one of the die-hard categories, has seen cap rates up over dollar stores. And office seems up only by 50 basis points — okay, more than odd, more like crazy.

When transactions are thinner than usual, “it’s very important to look critically at individual comps, including a thoughtful survey of what else is on the market now, when quoting a cap rate.”


Source:  GlobeSt.

1031 exchange 800x533

Real estate may not be America’s — or the federal government’s — sweetheart for long.

President Joseph Biden just released a proposed 2024 budget in which he pitched eliminating tax breaks for real estate and private equity firms as part of his efforts to cut the country’s budget deficits by nearly $3 trillion over the next decade.

The White House is aiming to recover about $19 billion by closing the loophole known as the “like-kind exchange,” or 1031 exchange. The loophole lets real estate firms put off paying capital gains taxes from income earned on property sales as long as they make an investment in a similar property elsewhere.

The Biden administration said the real estate industry was the only one getting a “sweetheart deal” from the federal government and equated the tax break to an interest-free loan.

Other items in the budget, such as a 25 percent minimum income tax on the top 0.01 percent of earners, also known as a billionaire’s tax, would also have implications for top real estate executives. Biden also called on Congress to raise the income tax rate from 37 percent to 39.6 percent for people making more than $400,000 and couples pulling in more than $450,000 per year.

Corporations in general could also have an income tax rate of 28 percent, an increase from the 21 percent they currently pay, but still a big reduction from the 35 percent that was expected from corporations before 2017.

“We found that in 2020 when I took office, that 55 major corporations, Fortune 500 companies, paid zero in federal income tax on $40 billion in profit,” Biden said during his remarks. “When I got elected, there were roughly 650 billionaires in America. Now there’s over 1,000. You know how much tax they pay? Three percent. … No billionaire should be paying less than a schoolteacher or a firefighter.”

Biden’s budget instead prioritizes making housing more affordable through programs such as the Neighborhood Homes Tax Credit, which his administration wants to fund with $16 billion over 10 years, and expanding the Low-Income Housing Tax Credit with a $28 billion infusion of funds.

The budget proposal also would set aside $10 billion for planning and housing capital grants for state and local governments to make reforms and streamline building new affordable housing projects on their own. Overall, the budget puts $175 billion toward programs that could facilitate the development and rehabilitation of affordable housing.

Transit in the tri-state region is also a big investment in Biden’s budget. Biden promised about $700 million for construction of the Hudson Tunnel Project — which could stabilize service in the long term on the Northeast Corridor — and $496 million for phase two of the Second Avenue Subway, an opportunity for transit-oriented development


Source: Commercial Observer