Market Comments, 11-2-22


The good thing about the internet is that it gives us so much information, some of it even true.

The bad thing about the internet is that it gives us so much information, some of it not true.

Analyzing market data for the last several months (short term) is nice to know, but does it reasonably and accurately suggest what we are to expect over the next few months going forward? That’s more to the point. It’s widely held in the investment arena that “the trend is your friend”, i.e., as long as the trend is in place, keep the same investments or investment strategies. But what to do when the trend changes? How do you know when the trend is changing? Is it announced somewhere? Sadly, no. (Extrapolating trends continuously is what gives economists a bad name – they always miss the turning points. It has to do with the defective models they use.) To anticipate changes, we look to the drivers of the trend. To that end, we’ll look at some of the factors affecting the supply and demand of gas station/c-store ownership, and from that, anticipated actions of buyers and sellers. But first the buying/selling trend, courtesy of BizBuySell. Note that these are all businesses in BizBuySell’s universe, not just gas stations and c-stores.   


The decline in the number of P-S transactions from Q1-22 to Q3-22, can likely be attributed to the meteoric rise in interest rates and the accompanying talk of the impending recession. In fact, Q1 & Q2 being declining GDP periods technically qualifies this period as putting us into a recession, contrary to popular media reporting. Q2-20 was the knee-jerk reaction to COVID being acknowledged and “promoted” beginning in Feb. of that year. The build-up from Q4-20 to Q1-22 was the market’s reaction to COVID being tamed and life returning to “normal”. It’s important to note that transactions typically don’t include the real estate, as opposed to gas station/c-store transaction in AZ that do. In the transaction data arena that is a significant difference.

What have we seen locally? Listings are precious. Good listings are like unicorns. Current owners continue to enjoy windfall profits, and are reluctant to cash in their chips. The continuing excess of buyers – particularly from CA - over sellers continues to price Phoenix stations as if they had CA ZIP codes. Transactions are hampered when over-the-top transactions are not supported by the appraiser’s valuations. Equity gaps of 15-20% are common. Failure to resolve these between the buyer and seller results in a failed transaction.

Let’s take a look at the driving factors affecting the small business with real estate market, and particularly gas stations/convenience stores.

Interest rates: This is probably the most visible factor affecting the transaction. The fed (Federal Reserve Open Market Committee – FOMC) raised the fed funds interest rate another ¾% again today (11-2) taking it to 3.75%-4.0%. (Technically, this is a bid-ask rate banks use to lend/borrow for overnight deposits, hence the lower and higher number.) The number we’re concerned is the ask, 4%. This is the number used by the market in setting or gauging other debt rates. From this, Prime is now 7%. Last May when the Fed began this rate cycle fed funds were ¼% and Prime was 3.25%. This has been a violent disruption in the debt markets, making a shambles of the stock and bond markets, and not limited to the U.S. The other G-20 central banks are mimicking the Fed’s moves with just a few exceptions. The current expectation is for another rate increase in Dec. (the 14th), but this next time for ½ point. Chairman Powell’s post-meeting comments yesterday indicated he expects to continue raising rates into the new year, and possibly peaking later and higher than was previously suggested. He also suggested he thought rates would have to be held at the peaking rate longer than was previously thought.  

The fed funds rate affects the rate a borrower pays to finance the acquisition. Most single owner gas station sales finance using an SBA loan, typically the type 7(a). This is typically a variable rate loan priced as a mark-up to Prime. Prime has roughly doubled in the last 6 months, raising the borrower’s cost, and reducing the debt service coverage the business will support. To keep the leverage constant, generally 15-20%, this means that either the price to be supported by the business must decrease, or the cash flow from the business must be increased. For sellers who’ve seen their bottom line expand graciously over the past 6 months-to-a-year, reducing their price is usually not on the table.

The economy: As mentioned earlier, we’re technically in a recession, but the walking-aroundeconomy hardly notices. That’s because we’re too busy complaining about inflation. But so far, the consumer has been hanging in there. 

We expect consumer spending to continue modestly through Q4 before retrenching in Q1-23. By then it’s likely inflation that will nose-dive the economy into a more noticeable recession, probably sometime during H1-23. This courtesy of the Fed who’s interest rate policy will get us there, by their own design and admission. During this period expect unemployment to increase, and the supply chain problem to bump into itself in correction, not uniformly and not all at once, going from shortages to excess inventory in different sectors. Continuing inflation and job losses will cause consumers to crawl under a rock and pull the rock over them. Look for sales to sag in both fuel sales and c-store sales. Also expect to see margins compress, particularly on fuel where luxurious pooled margins will retreat toward historical norms. It’s during this time that you might expect gas stations to come to market, and more “reasonably” priced.

Real Estate: We mention real estate since most single owner gas stations in AZ come with the real estate. We break it out separately as part of the pricing, and so we consider that segment of CRE that represents gas station/c-store investment real estate, single tenant net lease (STNL) CRE. Net lease cap rates began rebounding from all-time lows (all-time high in prices) in Q3-22. Cap rates for the STNL sector are still at their lowest point in 12 years, however, and have been slower to respond to market conditions. The spread between the 10-year Treasury and STNL cap rates hit a 12-year low in the third quarter of about 1.5%. This is like compressing a spring. The spring will want to expand to its normal compression (or spread), meaning either Treasuries will either reduce or cap rates will expand (prices will contract), or some combination. With the fed keeping rates high, and going higher, reducing Treasury rates is unlikely. (Keep an eye on the bond market for where this is heading.) The decreasing margin between the costs of capital and net lease cap rate levels continues to put strain on the market and is resulting in both upward pricing pressure and decreasing sales volume. Average days on market increased to 142 days during the third quarter, while the spread between asking and sales price increased “dramatically,” moving from 2.71% below asking price in Q2 to 4.29% in Q3. Convenience stores (with and without fuel) tended to follow general market cap rate trends in Q3, clocking either no increase or a slight increase in cap rates, meaning investor pricing held firm through the Q2-Q3 interest rate increases. As we move towards the last quarter of the year, the question is how long will it take for the net lease market to react to rising interest rates. We expect that cap rates will continue to increase (prices decline) in Q4 and beyond; the only uncertainly is by how much.

Oil: This causative factor is unique to our sector of business and real estate. It’s a direct influencer of the health and well-being of the gas station/c-store industry. It’s a global commodity uncontrollable by domestic public policy, and only influenced internationally. The current administration demonstrates daily its ignorance of the energy industries, matched only by inept foreign policies. This one factor is barely impacted by Fed policies, save for currency translations and cost of capital for industry participants. This is likely the singular cause of inflation not directly impacted by the fed’s rising interest rates and quantitative tightening. This one commodity refined into the multitude of products touches all people and all industries. The demand for transportation alone assures the continuance of gas stations. This is the epitome of a recession resistant industry. The shortage of diesel fuel has been in the news lately … last said to have 25 days supply. The shortage has certainly held the prices up even though gasoline has seen a price drop nationally. The result: food prices continue to escalate since the farmers tractors run on diesel. General merchandise continues to see price increases since 18-wheelers run on diesel. It will cost more to heat homes in the northeast and Midwest since heating oil competes with diesel and jet fuel in distillate refining. Watch the spread between diesel and gasoline at the gas station.  

The Light on the Horizon: What will turn the current downtrends? The mid-term election is now only 5 days away, Nov. 8. A quick Google search found 538 public opinion polls, all advertising to be non-partisan, yet with different statistics leading to different conclusions! The preponderance of expectations is that the Republicans will take control of both the House and the Senate. If so, expect a jump in optimism and statistical improvement in consumer and business confidence. The Black Swan Event: Republicans don’t take both chambers. Timing being what it is, whatever the outcome of the election it will take several months for changes, if any, to materialize. However, we expect the pendulum reflecting these changes to begin to swing the other way by at least Q2-23. For sellers, you still have a few months to enjoy the margins and reflect those to buyers. For buyers, you have a few months to reposition your assets for cash to acquire your next station. For financing, we’re late enough in the cycle that a variable rate loan may be a better choice that a fixed rate, especially if the term, or your anticipated holding period, is 7 years or more, and your pre-payment penalty runs out in more than 5 years.

Market Comments, 10-5-22

Meeting today (10-5-22) in person for the first time since March 2020, the OPEC+ meeting in Vienna is expected to see the largest coordinated downward revision in years as the oil group was reportedly considering a 1 million b/d cut for November 2022.  Early news from this meeting is that they’ll reduce production by 2 million b/d (about 2% of global supply), effectively thumbing their collective noses at President Biden, citing higher interest rates and a weakening global economy.  Our jump in gasoline prices the last week or so was in anticipation of the 1mm b/d cut.  Expect a further bump from the overage. 
Not helpful to the economy already reeling from the record-setting interest rate jumps of the last few months. Like the little boy putting his finger in the dyke, Mr. Biden can be expected to announce with much fanfare a consecutive (or continuous) drawdown of our strategic petroleum reserves in an effort to compensate for the missing volume, hence restrict price escalations already in the market. (Too little, too late.)

While consumer spending, the bedrock of our economy (historically about 70% of GDP), has held up during the economic slowdown (recession?), the source of spending is not a bottomless pit.  Excess savings accumulated during the COVID period are still in excess of $1 trillion and along with increasing credit card balances will likely carry us through the Holiday Season, however, behind-the-scenes economic indicators are not optimistic going into ‘23. 

The Fed’s recent record-setting ¾% increases in the fed funds rate has raised this benchmark rate from 0 (that’s zero!) to 3.25% in 5 months.  Forecasts are expecting this rate to finish the year at 4.25%-4.5% … a 5% rate December 31st shouldn’t be seen as a surprise. 

In broad strokes, we suspect many of you reading this to be seeing strong bottom line performance for the year.  Many of the potential buyers for stations are already in the business – some local, many out-of-state. At $6.50-7.00/gal, many CA dealers are seeing exceptional sales, margins and profits.  And many of these folks are looking for the exit doors from the state.

Potential sellers reaping circumstantial profits since 2020 (COVID and post-COVID periods) may want to consider coming to market before the economy of 2023 becomes visible to all and entrenched.  Many potential buyers are cash-heavy, so higher interest rates are not a financial barrier to acquisition (a psychological barrier to be sure!).

Economic conditions that we have now bring a great deal of emotion and chaos to the market … all markets … the most visible being the stock market and the debt market.  Commercial real estate and privately held business markets are more opaque and harder to read. These markets tend to be driven as much by rumor and superstition as hard data.  We continue to receive buyer incoming calls, and exploratory calls (cold calls) from lenders.  Lenders are also sitting with too much cash that needs to be placed before the end of the year, and each time the Fed raises the fed funds rate, making loans gets more difficult – borrower resistance (fear?).         

We’re starting to get data from the housing market about the topping out of this market and the drop-off from the buyer pool (a function of buyer qualification and affordability). Many people look at this as a window into commercial real estate.  Not the case!  The fundamentals driving these 2 sectors of real estate have very few overlaps. About their only commonalities are they both have dirt, and both deal with money!  Historically the CRE market lags residential by 12-18 months. The variables driving or impacting these two markets during this period can easily be reversed or disassociated during this period, especially with the volatility in the markets at this time.       

And lastly, we need to note that the mid-term election is now about a month away - as of this writing only 33 days before election day.  Whether you’re happy with America as we have it or not, please get out and vote.

Market Comments,  8-1-22

There were 2 stinging news events for capital markets last week (week of July 25th): (1) The Fed raised their targeted fed funds rate by another ¾%, and (2)  Q2 GDP came in at a negative .9%, the 2nd consecutive quarter of declining GDP.
The fed’s decision sets the overnight lending target rate for banks to between 2.25% and 2.5. The rate increase is the 4th in the Fed’s front-loaded tightening cycle, following an initial 25-basis-point hike in March, a 50-basis-point increase in May, and a 75-basis-point move in June.

Real gross domestic product declined at an annualized rate of 0.9 percent in the second quarter, following the 1.6 % decrease posted in the opening three months of the year. Two consecutive quarters of falling GDP is considered by some to be the technical signal of a recession. The definitive call, however, for when the economy enters and exits recession in the United States is up to the National Bureau of Economic Research (NBER) whose Business Cycle Dating Committee determines the start and end dates for each economic cycle. It considers recession to involve "a significant decline in economic activity that is spread across the economy and lasts more than a few months”. (NBER is a non-government private research firm.) NBER typically takes several months gathering & analyzing data before pronouncing a recession.  A recent poll showed that 55% of real life walking around Americans think we’re in a recession now. You’ve undoubtedly done your own poll and determined we’re in some state of economic weakness.

Some would say we have 2 problems each with a solution that aggravates the other problem. I offer that we really only have 1 problem … the Fed.  The Fed has created the 2 problems, inflation & recession.  The Fed set the stage for inflation coming out of the 1009-2010 Great Recession with massive money printing and low interest rates, quantitative easing (QT). Not bad at the time, but when the economy was back on course about 2017-2018, they didn’t let up.  It took COVID and post-COVID policies to set our current situation in motion. 

The problem now is that the Fed’s tools of increasing interest rates and reducing its balance sheet (quantitative tightening – QT) can’t fix the type of inflation we have now. Our inflation is caused by a supply problem (think supply chain disruptions) not demand excesses. The Fed can raise rates from now until thunder comes and it won’t affect our supply chains.  It will, however, assure the economic weakness we are now experiencing.

So, are we destined to run rates through the roof with no effect?  Of course not. By measuring other economic, fiscal & monetary factors, smart people expect we’ll max out the fed funds rate at 3 -3 ½% about Q2-23 … something less than a year from now.  Interest rate relationships being what they are, this would take the prime rate to about 6 - 6 ½%, and an SBA 7(a) loan for most borrowers to 8- 8 ½%.  The inflation impact of this is expected to reduce CPI to 5-6%, well above the Fed’s widely advertised target of 2 - 2 ½% on a long term basis. (I’ve never read anything saying what exactly “long term” is.) If these rates & times are met, we should expect rates to begin reducing again (QE) H2-24 to H1-25. 

But this is a fairly idyllic model, and models generally don’t pan out.  The Fed tried the QE to QT exercise in 2017-2018 and only got about a point into raising rates before the stock market threw a hissy fit and the Fed promptly reversed course. 

So, how’s the market taking this?  As you might expect, or perhaps know if you’re an active participant, i.e., you have a gas station listed in the market, or you’re a buyer with a loan in process. As my old aunt used to say, “A blind man on horseback could see this coming”.

I recently ran a feasibility check for a buyer who had put a business in escrow.  Three months ago, when Prime was 3 ½% the business covered debt service with room to spare.  Now, with Prime at 5 ½% his purchase with 15% down was insufficient.  Now he needs about 22% down.

Buyers are still active, but less confident in their ability to purchase a business with real estate at what they consider acceptable leverage.  We’ve been nursed on low interest rates for a decade.  Now having to adjust to “reasonable” rates will take some getting used to.  The buyer’s (and broker’s) knee-jerk solution is for the seller to carry the shortfall.  Others think the seller should finance the whole thing!

Fortunately, buyers have adequate cash.  They may not initially be predisposed to investing it to the degree required, but for an attractive business well-priced the deal can be made.  Currently in the Phoenix metro market many if not most asking prices are suggestive of CA ZIP codes.  This is reminiscent of the 2005-2007 market when the easy money policy and fog-the-mirror underwriting with government endorsement led to beyond the norm pricing.  We all know what happened when the market “corrected” in 2008-2010.  As is said, history doesn’t repeat, but it rhymes.

And we’re not done yet folks.  With the fed funds rate currently at 2 1/4 -2 1/2 %, the Fed has forecast it would be 3 – 3 ½% by then end of the year.  At 3 ½%, Prime becomes 6 ½%.  A typical SBA borrower for a gas station is offered Prime + 1 ½-2 %.  This makes the loan rate 8 – 8 ½%.  Indeed, lofty compared to the 5 ½% loans being offered just a few months ago.  In pricing of money, this becomes sticker shock.  From a practical point, the burden on historical income statements is extreme.  Structuring a transaction now will take any or all of three things:  a lower price,  buyer’s larger down payment, of seller participation in the financing.

Brokers seem to be soft peddling the impact of the recent rate hikes, or not peddling at all!

It should be noted that even with SBA loans, not all lenders bend the same way in meeting SBA guidelines.  Some lenders want to make loans, some not so much.  Gas station financing has always been a tricky niche to occupy for a lender, and also for the borrower.  Yesterday’s active lenders may not be in the market tomorrow.  A buyer can chew up a lot of time in escrow looking for a lender.  As I’ve said often, in escrow, time is not your friend. 

We can take a que from the CRE investment market. CAP rates for single tenant net lease (STNL) investments are starting to climb, meaning prices are starting to decline.  The historic relationship between interest rates in the market, base rents and prices are starting the take hold.  This is the investment (investor-tenant) adjustment equivalent to EBITDA/SDE, interest rates and price relationship for owner-operated properties.  We keep an eye on this aspect of our market because of its transparency, size (dollar volume & number of transactions), and efficiency relative to changes in the bond market. This market is verifying what was discussed above.

Not to end on a sour note - our glass is always half-full.  This is our nth experience with a difficult investment and economic environment going back to the stock market crash of 1987.  I’d been a stockbroker 7 years at that time.  

Market Comments, 7-5-22

“Our market”, the market for buying and selling a gas station/c-store, used to be well-defined with limited and somewhat predictable outside influences.  Not so today.  Factors affecting us now come from all sides, seemingly random and mostly unannounced, leaving us to deal with the surprise impact.  Whereas the singularly unique product for a gas station, transportation fuel, is a global commodity, its price and availability are driven by events beyond our control, and even the control and often influence of our own government. 

Accordingly, we’re going to gingerly step outside the box of conventional focus in this issue of Comments, and discuss some of the affects of our surprise factors. Some of these topics will appear to be strategic in nature, having effects “sometime” in the future.  However, as is sometimes said, we believe the future is now.
Looking at Your Customers:

Consumer data have finally started showing what we are all feeling ... the struggle is real. Consumer prices measured by the PCE (personal consumption expenditures – one measure of inflation) deflator rose another 0.6% in May, lifting the annual rate back up a touch to 6.35% from 6.29% previously. (May CPI was 8.6% - the PPI was 10.8%.) Elevated and persistent price pressures have dramatically weighed on real disposable personal income, which is now about 5.4% below where it would be implied by its trend in the absence of the pandemic. That's a dramatic hit to income, and it's weighing on consumers' ability to spend. Real personal spending slipped 0.4% as a result in May, even as consumers continued to save less compared to pre-pandemic habits. While consumers still have room to tap sources of staying power, the May data suggest it may be running out.

Piling onto the weak spending data, measures of consumers' confidence moved sharply lower in June dipping to 98.7 as consumers grow particularly pessimistic about what's to come. The expectations component of the consumer confidence index slid 7.3 points to 66.4 in June, which marks the largest monthly drop in over a-year-and-a-half and the lowest reading for expectations in 9 years. The deterioration in confidence is not surprising amid elevated gas prices, deteriorating labor market prospects and simply broad concern over finances, and it presents a notable shift in consumer psyche.

Even with the tide shifting and consumers' staying power showing signs of running out, it’s expected that spending will hold up through the summer months. Sky-high prices have so far been little match for the desire to travel and participate in in-person services this summer. Households are increasingly relying on their balance sheets to fund spending.

The “jobs plentiful" component as recently as March had 56.7% of consumers saying that jobs were plentiful was the highest in records going back more than a half century. A smaller share of consumers, 51.3%, find that jobs are plentiful today. This is still historically high, but it is also the 3rd consecutive monthly decline, and lower than it has been at any other point in the past year.

Sharp increases in the jobless rate are associated with recessions. The unemployment rate is just a tick off a 50-year low at present. Wells Fargo’s latest forecast has the unemployment rate rising over the next year; that is generally associated with a deterioration in consumer confidence and consistent with recessions.

As uncertainty builds around the supply capacity of OPEC+ and oil demand continues to surge despite expectations of demand destruction, bullish sentiment is building in oil markets. Now, to add to that bullish sentiment, another form of supply disruption is springing up around the world: labor strikes. Operations at France’s Fos Refinery were halted by strikes and Norway’s offshore production was heavily impacted by them as well. It seems the oil market is under siege from all sides, from fundamental tightness to underinvestment, disruptions related to the war in Ukraine, and now strikes. (Reminder: the oil that provides our gasoline & diesel is a global commodity.)

The recent OPEC+ summit failed to impress. OPEC+ agreed to maintain a 648,000 b/d increase in its production target for August, keeping its commitment unchanged despite increasing evidence that spare capacity within the oil group has thinned to its lowest level in years. So, Mr. Biden is unlikely to get any help from the Middle East in spite of his pleading. Meaning our domestic volume recovery is going to have to come from domestic supplies, contradictory and in the face of green energy policy. Is this likely?  Don’t forget, it’s an election year!

The Real Estate Component

Most of the gas station/c-stores that come to market in AZ include the real estate that houses the business.  So, the business sold, and the metrics calculating the price, include a valuation of the real estate, typically incorporated into the overall price.  This is not a difficult process, but one largely overlooked in detail.  In the current environment, however, paying attention to the separate real estate and business valuation allocations is important-to-critical in deriving valuations. You can trust that the appraiser and lending banker do.

Bear in mind that CRE markets and analysis deals with CRE from an investor-tenant position, not usually considering an owner-occupant.  The investor’s only source of income is the tenant’s rent.  On owner-occupant of the real estate is in a much different position.  Nonetheless, the isolated value of the real estate within its market segment, or sub-segment if data is available, should be considered.

According to a First American Financial Corporation analysis, cap rates might finally start to recover some of their value.  The firm’s potential capitalization rate (PCR) model for the first quarter of 2022 estimates that capitalization rates are based on the historical relationship between interest rates, rental income, prevailing occupancy rates, the amount of commercial mortgage debt in the economy, and recent property price trends.

As the company noted, inflation has stubbornly hung in, rather than being the “transient” phenomenon the Federal Reserve predicted it would be because of pandemic-induced supply chain issues.

One result was a rise in the 10-year Treasury, which went from roughly 1.7% in early January 2022 to a high of 3.48% when the most recent Fed rate hike happened. The 10-year closed June 30 at 2.98%. Given additional expected quantitative tightening - the Fed allows bonds its holding to reach maturity and then removes them from its balance sheet, which eliminates that extra money it had pumped into the system - First American says that the 10-year yield will likely continue to increase.

The 10-year is seen as a virtually risk-free way of investing and one that investors use to measure the value of riskier investments, including CRE. Another investment will have to now return more to be seen as worth the risk.

          “Since capitalization (cap) rates are a measure of return on an asset, higher ‘risk-free’ rates mean sellers will need to reduce their price                       expectations or increase cash flow, if that’s an option, to entice buyers seeking competitive yields, which should also push cap rates up,” First             American senior CRE economist Xander Snyder said in prepared remarks.

Currently, cap rates are still at near-record lows (implying that prices are at record highs), but the PCR model suggests that slower price growth is likely to push cap rates up (and prices down, without an income increase to provide an offset).

CRE strategic advisory RCLCO released a new report saying that sentiment of real estate professionals has slipped nearly down to the range the firm associates with market distress and recession. The RCLCO Current Real Estate Market Sentiment Index, which is a 100-point scale, slipped from the 82.1 at the end of 2021 to the current 35.1 in May. The firm says that a value of 30 is generally a sign of bad economic times for CRE markets.

This hasn’t been the only sign of falling confidence. The CRE Finance Council (CREFC) found that overall sentiment among its board of governors took a nosedive in Q1-22.

In the RCLCO analysis, respondents expect continued market deterioration over the next 12 months and 92% of all respondents think there will be a recession within the next two years; 54% expect a recession within one year. Roughly two-thirds say that real estate conditions will get “moderately” or “significantly” worse.

Commercial real estate, however, continues to provide a solid hedge against inflation, a trend that has been borne out over multiple decades during periods when inflation has exceeded 4%, says Carly Tripp, global chief investment officer and head of investments for Nuveen Real Estate.

Speaking on the REIT Report, Tripp noted that Nuveen research shows that compared to other asset classes, CRE was the only one that emerged with an overall net positive return during those inflationary periods.

“We always say real estate is an inflation hedge, and we’re seeing that play through right now. So, it’s a good time to be in commercial real estate in my opinion,” Tripp said.

Tripp also said that the current inflationary environment has not bled into increased rental income for landlords. Instead, the increased rental income by and large has been a result of “incredibly strong demand.”

This generally known aspect of CRE is why many, if not most, buyers of gas stations in this environment will want the real estate as an asset of the business.

Inflation vs. Recession, the Plus & Minus of High Interest Rates

After a long run of incredibly cheap capital, the commercial real estate industry is adjusting to a big jump in the cost of debt. In some cases, loan rates that were quoted around 3% six months ago are now in the mid-to-high 4s. Yet just how impactful those higher financing costs will be on deal flow, pricing and investment strategy remains to be seen.

Real estate investors agree that higher capital costs are putting upward pressure on cap rates (driving prices lower), and there likely will be some near-term choppiness in the transaction market as both sellers and buyers adjust pricing expectations. At the same time, the market has to account for some counterforces, including strong fundamentals and a still sizable amount of funds available. In particular, there is “high velocity” capital from closed-end funds that have deadlines to place capital that has already been raised.

The Federal Reserve raised the federal funds borrowing rate by another 75 basis points (bps) in June. Range now 1.5-1.75%. The increase follows a 50 bp hike in May. The market is looking for another 75 bp raise in July, and 50 bp increase in Sept. Although Fed rate increases are more closely correlated to short-term floating debt, many in the real estate industry also have been watching big moves in the longer-term rate benchmarks.

The 10-year treasury yield has climbed sharply, rising about 140 bps since early March to hover around 3.1% as of May 6. Layering on top of higher interest rates, many lenders have widened their spreads by 20 to 30 bps to account for higher inflationary risk. The result is that loan rates being quoted by lenders are now 150 to 200 bps higher than they were in Q1-22.

While raising interest rates have been the standard go-to solution for the Fed when inflation has gotten out of hand for the past 70+ years, it’s not likely to be the solution this time around.  It will, however, be almost certain to take us into a recession.  (I’ll have more on this in an up-coming white paper about the Fed, inflation and recession.)

Currently, fundamentals of CRE remain strong, although not evenly across all sectors.  Typically rising interest rates trigger higher cap rates for CRE.  These will carry over to operator-owned real estate, e.g., your gas station.  Recall that cap rates and prices move inversely with each other, i.e., a rising cap will produce a lower price (unless income rises as an off-set).  Rising interest rates to combat inflation invariably produces an economic decline, recession. Income will therefor typically fall as a lagging part of the process.  As income falls in a rising cap rate environment, this feeds the overall price declines completing the declining part of the CRE cycle. This has historically been the case.  This will not be the case this time, simply because the Fed’s raising rates won’t halt inflation.  Then what?  An excellent question!  

The most recent stronger-than-expected CPI print laid the groundwork for the past couple weeks, sending markets into a churn and raising the risks of recession. As Wells Fargo detailed in a recent update, they now look for the U.S. economy to experience a mild contraction in mid-2023. Inflation has become entrenched and a sharp moderation in demand, if not an outright contraction, would need to occur to bring price growth to more sustainable rates, in their view. Economic data released last month add to evidence that the chances of a soft landing are fading.

In response to the inflation alarm bells, the Federal Open Market Committee (FOMC) has turned more hawkish in recent days, signaling that an aggressive pace of tightening lies ahead. The dot plot, which visualizes each member's projection for the year-end target of the fed funds rate, showed the median Fed policymaker anticipates 175 bps of additional tightening by the end of this year. In combination with the shrinking of the Fed's balance sheet, financial conditions are set to tighten significantly in the coming months.

Softening demand amid the high-cost environment will likely compress business profit margins. To that end, signs of shakier earnings have crept up. The proportion of small business owners reporting increased earnings in the past three months tumbled seven points in May to a net -24%. The share of owners who cited increased costs as the primary driver of lower earnings has more than tripled over the past two years to 20%.

Regulating Your Business

This is well outside of our wheelhouse, but a major event worthy of your attention.

On June 30, by a six to three vote, the US Supreme Court issued its long awaited ruling for West Virginia vs the Environmental Protection Agency. The narrow legal issue here, simply stated, is whether the Environmental Protection Agency (EPA ) had the authority to regulate carbon emissions from so-called “stationary sources, ” such as coal fired power plants, or whether this regulation constituted an excessive and inappropriately broad grant of power from Congress to a federal regulatory body.

The court made the latter interpretation.

In terms of precedent, in 2007 the US Supreme Court ruled in Massachusetts vs the Environmental Protection Agency that carbon pollution is subject to regulation under the Clean Air Act and that the EPA was required to act if this pollution endangered public health and welfare.

The Clean Air Act was first signed into law by President Nixon in 1970 and reauthorized by President Bush in 1990. In 2012, the Obama administration issued its Clean Power Plan to regulate power plant carbon emissions, and the Supreme Court voted to stay these new regulations. What was at issue before the court technically was an obscure paragraph (7411d) in the Clean Air Act which broadly authorized the EPA to issue pollution limiting rules (including those affecting CO2 emissions) so long as the agency also took into account “cost, non-air impacts, and energy requirements”.

This ambiguous phrase was first interpreted broadly by the Democratic Carter administration and then narrowly under Republican President Reagan in a manner far more favorable to polluters. Environmental groups sued for more vigorous enforcement and the Supreme Court issued what has become known as the "Chevron deference" which states that the courts should defer to federal agencies— in this particular case President Reagan’s EPA.

The Supreme Court’s decision today (June 30) effectively overturns the court’s prior policy of judicial restraint under the Chevron deference. Using what is called the nondelegation doctrine the court found a way to effectively eliminate the Chevron deference. The so-called nondelegation doctrine permits the high court to invalidate federal regulatory decisions which lack explicit Congressional mandates.

The potential scope of this Supreme Court ruling utilizing the nondelegation doctrine is potentially breathtaking in that virtually all major federal laws include some delegation of often imprecise (and sometimes contradictory) rulemaking powers to federal agencies.

One might quickly respond that a motivated Congress simply has to rewrite precise laws that will pass muster. However, given the realities of the filibuster and a highly politically polarized Congress, this would seem literally impossible.

Every major piece of federal legislation granting any regulatory authority whatsoever will now be scrutinized under a new, harsher light of potentially aggressive court review.

At a minimum, this severely weakens the federal government’s regulatory authority in the near term and produces a potential schism among different states that will have to fill in the administrative void created by the courts. We expect at a minimum, cases involving worker’s rights, consumer protection, the environment, and healthcare to receive similar close scrutiny by a newly emboldened Supreme Court. It would not be a stretch to suggest that the OSHA, regulating workplace health and safety under the Department of Labor, might be found invalid.

The narrow takeaway from this ruling is that the Supreme Court has made it extremely difficult for the federal government to regulate CO2 emissions. And we would expect similar prohibitions for other climate related issues.

However, the implications of this ruling are likely to be felt for years across the entire federal government. This case is not really about pollution or the environment. Using the nondelegation doctrine as justification, the court has opened the door for a dramatic challenge to the authority of every federal administrative agency.

Last unofficial count in 2015 there were 440 U.S. Government agencies, sub-agencies, executive offices, departments, etc. which all fall under the banner of administrative agencies.  These are staffed by appointed bureaucrats, not elected officials, and unaccountable for their rules and regulations which in practice have the effect of law. This is the administrative state, aka “the swamp”, that has grown like a cancer over the past several decades.

This Supreme Court ruling while directed singularly at the EPA opens the door to review ALL of the Administrative State.  It will clearly take years, perhaps decades, measured by the number and political leanings of the particular administration in the White House.  But make no mistake, this is a pivotal decision that will effect private companies and “we the people” for years to come.  Expect the current administration to drag their heels in complying with the ruling, and expanding it to other agencies, but the door is open.

Market Comments, 6-9-22

As of this writing, there are 25 gas station/c-stores listed for sale in AZ-statewide, and 13 in Maricopa County (Phoenix metro) only.  Compared to pre-COVID (about 2017-2019) this volume is down about 40% statewide, and 50% for the metro. 

Perhaps more notable is the quality of the listings.  Many, if not most, in the Phoenix metro area are priced as if in CA ZIP codes, i.e., over-priced on a pre-COVID scale, and largely so. Also, many of these are class B or C properties, e.g., deferred maintenance. 

The pricing of an operating business that includes the real estate is done primarily as a function of adjusted cash flow, EBITDA, or seller’s discretionary earnings, the latter being the most common for privately held businesses.  Pricing on a net asset basis, or cost to replace, in a high inflationary environment such as we have will over-value the real estate-business combined.  This typically leads to wide spreads between “asks” and “offers”, and if a middle ground is found, creates the same spread for the appraiser, and subsequently lack of confidence for the lender in reconciling the final value. Lenders reflect this lack of confidence in raising the underwriting bar for the buyer, e.g., larger buyer down payment, higher interest rate, shorter term to reset if an adjustable rate loan, etc.

Sellers are becoming more interested in selling reflecting acknowledgement of the looming softening economy that seems to be widely anticipated (and with good reason). But pricing seems to reflect the past, not the future.  This is typical during the market-topping process. 

Buyers are still active, and in most cases have adequate cash available. There’s almost instinctive reluctance, however, for them to extrapolate past performance into the future.  Their offering approach is to discount the asking price a “substantial amount” to allow for risk factors, the amount of which is undetermined.

This is our market today. It digests all we know about inflation, interest rates, the war in Ukraine, supply chain disruptions, gasoline availability and pricing, labor shortages, FED policies & activity, and who will win the NBA championship. (Odds makers are 67% with the Warriors.)

This is likely to be our market tomorrow.  Now that we’re in the summer months, political campaigning will begin a serious ramp-up in going into the mid-term election in November.  Many are anticipating a whole new world when the winners take office in Jan.  We’re not one of the many! At best we may stop the bleeding, but to turn the economy and society around will take time.

At MJG we have over 2 decades of positioning ourselves in our market – servicing gas station and c-store owners and investors in AZ. Beyond that, we have over 40 years participating in financial, capital, and investment markets, prospering during good time and surviving the not-to-good.  If you aren’t already, maybe you should consider availing yourself of our services.  

Market Comments, 5-4-22

Our market, the market of buying & selling gas stations & c-stores, precedes along delicately.

Sellers, and potential sellers, peek over the counter occasionally amid the chaos of the day to consider their opportunity to sell, and buyers, the bulls in the China shop, stampede among the offerings only to second guess their decision to buy when faced with a real opportunity to acquire.

Both are confronted daily with the myriad of uncertainties that have been plaguing us for a year or more. The number doesn’t seem to decrease and the complexity of the issues seems to increase.  The latest addition:  rescinding Roe vs. Wade.  What does it mean? How will this issue resolve, and how soon?  What will it do to the price of oil?  Unrelated you say – maybe?  The questions are endless.

The one certainty we’ve had for over a decade now was that the price of money, interest rates, is low – cheap – still is – and the supply plentiful.  But now that seems to be eroding, the price that is.  The Fed last Wed, 5-4, announced it’s raising the Fed Funds rate by ½ point. This has been advertised to be the start of a rate raising campaign to last the year during which rates are expected to increase over 2% by the end of ‘22.  That would take the prime rate to about 6 ½ %. (Prime has averaged 6.81% from 1955.)  

The spike in ’79-’82 was courtesy of Paul Volker, Fed Chairman at the time who raised rates to curb the inflation (stagflation) of the ‘70s.  Might we have a repeat of this action?  Maybe … probably not.  For one reason, it wouldn’t work – we have different dynamics in place today.  And for another, Chairman Powell isn’t Paul Volker – he’s too weak.  He’s shown that in his attempt to raise rates in 2018, and back-peddled when the stock market took a dip, threatening to collapse.  Powell promptly reversed course.

We anticipate a reasonable Powell will raise Fed Funds another ½ point in June (Although his forward guidance denies it at this time.), and maybe a ½ point in July, then multiple ¼ point increases going to the end of the year.  All this trying to engineer a “soft landing”.  We doubt this will work.  The recession is upon us.  Q1-22 GDP down 1.4%. And rates are just starting to rise.  If Q2 is down also, we’ve got a recession, by definition.  The volatility of the GDP components, however, suggests this downtrend may not continue. The reduction was driven predominantly by a widening trade deficit, as import volumes climbed rapidly while exports declined. The supply chain breaks impacting inventories also contributed to the decline. And with stimulus concluded, less government spending contributed to lower GDP also.

The war in Ukraine, COVID related lockdowns in China affecting about 40% of the country’s working population, and the EU’s threat of cutting off oil from Russia all affect not only the price of oil, but it’s availability.  We’ve not heard of direct shortages yet, but they’ve been discussed on your favorite news channels. 

The first week of May could have brought us a much-awaited paradigm shift, however, the markets are still appraising the impact of China’s COVID lockdowns amidst the mass-testing taking place in Beijing and the probability of a comprehensive European embargo on Russian oil. With no clear way out for either of those, Brent futures remained range bound, closing Tuesday, 5-2, around $106 per barrel. The day-to-day spread between Brent & WTI has been $2-4, a fairly wide spread speaking to the volatility of the market.

While OPEC+ is widely expected to agree to another monthly increase of 432,000 b/d, the widening gap between the oil group’s stated objectives and reality is becoming too glaring to ignore.  For March, the last month for which official OPEC+ data is available, the discrepancy added up to 1.45 million b/d and is set to only increase in April as Russia’s production went downhill.  

So how do we contend in this environment to attract a buyer (if a seller) or capture an opportunity (if a buyer)?  Chaos in the market brings on market inefficiencies that show up as good deals for both buyers and sellers.  Whether a buyer of seller, will you recognize these when you see them?

Buyers, identify your acceptable acquisition criteria, and be committed to it. Focus attention to detail, do your homework.  Assess market opportunities – are your criteria represented in market opportunities? How far away from the market are you? 

If you’re a seller, “preparing for market” is not just steam cleaning the forecourt and painting the parking stripes, changing the burned out light in the bathroom, and cleaning the windows.  It’s tidying-up your documents, and getting you P&Ls and balance sheets current even if it means leaning on your accountant. Incomplete or poor quality documentation is the single largest impediment to selling your business, even if it includes the real estate.  These also impact your buyer’s ability to get a loan.

In this environment cash is king!  Inflation has driven up the price of real estate, both asking rents/sf, and CAP rates for investors.  CAP rates for investment gas station properties that historically have risen with interest rates have failed to do so – yet. But also, business multiples that typically contract on the threshold of rate increases and recessions have also held firm – so far. Structuring transactions today are not the same cookie-cutter contracts you may have been used to.  It’s reminiscent of coming out of the 2008-10 Financial Crisis, although the dynamics are different.  

In chaotic circumstances is when values and bargain opportunities are made (they’re made, not found).  Dedication to the purchase-sale process in mandatory.  Just about everything takes longer to get done, and costs more that it used to.  We don’t expect that to change anytime soon.

We’re as busy as we’ve ever been, but we’re getting things done.  I believe it’s called work.

Market Comments, 4-8-22

​The supply:demand imbalance (gas stations for sale vs. buyer demand) has increased beyond previously observed norms. But that shouldn’t surprise us.  Imbalances are everywhere … interest rates vs. inflation, GDP vs. continued budget deficits, petroleum distilled products vs. market demand, Government policies (all kinds) one day vs. the next day, a war that Putin apparently can’t decide to win or not, and a western alliance (NATO for one) that can’t decide if or how to support Ukraine.  But back to our market.

Buyer demand, mostly from CA, is bringing their pricing points with them.  Marginally performing businesses with real estate in the Phoenix metro market are selling at relatively high multiples as a function of seller’s discretionary earnings, or EBITDA if you like.  Normalized Phoenix average multiples pre-COVID were 6-6.5 times for B class property.  In CA, that multiple was 10-11 times.  CA is still 10-11 times, but Phoenix has migrated up to 8-9 times.  Last year was the first year in a long time (maybe ever!) that CA had a net loss in population from migration (not counting illegal immigration – an unknown wild card).  Similar pricing mechanics are happening in Las Vegas.

Lenders are active!  With the Fed now openly in a hawkish mode – raising rates and reducing liquidity via their balance sheet – lenders are actively trying to create loans to reduce their excess reserves parked at the Fed from all the QE programs over the years.  They’re mindful of the interest rate and economic risks in the environment and are structuring terms to hedge those risks.

You’ve heard the news by now.  The Fed is expected to raise rates 6 more times (most likely) this year, and maybe ½ % on at least 2 of those occasions.  They’re expected to reduce their nearly $9 trillion balance sheet by $95 billion per month beginning as soon as next month (May).  At that rate, it is expected to take them about 2 ½ years to normalize at about $6 trillion … the new equivalency in support of the economy today.  All this aimed at fighting inflation. But it won’t work!!  (keep reading to find out why.) 

What increasing interest rates will likely do, however, is get us a recession.  We’re probably already in one, but it won’t be called until later this year … somewhere around election time.  The 2 year note now with a higher yield than the 10 year designates the inverted yield curve you’ve heard about.  For a normal yield relationship, the longer term Treasury has a higher yield than the shorter term. There’s several short term/long term Treasuries that can be, and are, compared for the spreads. Any of them can be inverted or not at any time.  Many, if not most, are now flirting with inversions on a day-to-day basis. An inverted curve, however, is not an assurance of an imminent recession. Going back to 1978, recessions following inverted curves occurred between 7 months and 3 years.

And so why won’t raising rates cool inflation?  In our economic cycles, most recessions are caused by overheated demand – consumers buying more than supply can deliver, thereby raising prices.  “Free money” like we’ve had for the past decade will do that, but that’s not what’s happened.  Enter COVID and supply chain breaks, and now a war that exasperates those supply chain links.  Raising interest rates won’t off-load imports from China any faster, or put more 18 wheelers on the road to deliver goods, or produce more oil from wells that have been shut down for over a year. In fact, what increasing interest rates will likely do, and is already starting, is causing businesses to reduce expenses to stay in business.  One of the chief victims in expense cutting is labor.  Wages most recently have spring-boarded over 5% Y-O-Y, but in a nearly 8% inflationary environment – result: consumers have lost 3% of their purchasing power.  Inaccurately measured as it is (U-3), unemployment is now below 4%, or at a level termed “natural” or “full” employment. Consumers have strong balance sheets, and there’s still over $1 trillion in “excess savings” as a result of all of the COVID giveaways.  But when news of the coming changes takes hold, expect consumers to retrench.  Higher prices, losing jobs, tapping savings for day-to-day expenses will get us to continued GDP declines – 2 consecutive quarters of declining GDP defines a recession.  We can reasonable expect this in Q4 – if Oct, the month before the election.

Government spending adds to GDP.  Will U.S. support of Ukraine keep our economy up?  Not likely – a proverbial drop in the bucket.  Biden’s Grow Back Better proposal will swamp Ukraine’s support. And how will the Fed whittle its balance sheet with continued deficit spending?  Who’s going to buy Treasuries if the Government is selling more, and the Fed is not buying?  Well, it must be some other investors including foreign countries.  We probably shouldn’t look for Russia and China to line up at the Treasury on auction day.  Notably, the other G-20 countries are in similar economic situations as the U.S.  At best, the U.S. cost of borrowing will increase.  What will carry us (hopefully) is that we’re in better condition that the other countries.  This is indeed the case today, which is why to U.S. dollar is still stronger than other foreign currencies.

All this as a backdrop for gas station buyers and seller.  But before we close, and brief word about oil, identified as a primary contributor of inflation.  Biden announced a week or so ago that he’s releasing 180 million barrels of strategic reserves into the market at a rate of 1 million barrels per day for 6 months.  Biden estimated the result at the pump would be $.10-.35 per gal.  The average national price on 4-4-22 was $4.17 gal.  His $.10-.35 per gal. is a 2-8% decline.

The U.S. uses about 20 million barrels of oil per day. So, the 1 million barrel release from the reserve only adds about 5% to the supply. But it doesn’t really add anything to the supply because importers will simply reduce imports or domestic drillers will reduce output to equilibrate for the new oil. There never was an oil shortage in the U.S., so adding a new source of oil doesn’t alleviate a shortage that never existed. It simply causes some oil to be redirected to other buyers. Oil is a global commodity and trades in a global market. The price is set mainly on futures exchanges in London and New York. Those markets focus on a wide variety of market variables of which the release from the reserve is only one. In fact, global output is about 92 million barrels per day, so the U.S. reserve addition is only 1.08% of total output. That’s hardly enough to affect the world price one way or the other.  More likely to reduce the price of fuel is the anticipated recession, or at least economic slowdown, by reducing demand.  

And so how may this translate into pricing for the sale of a gas station/c-store.  Looking at the dynamic from prior inflationary and recessionary cycles, we can develop a reasonable expectation.  During prior recessions or slowdowns, the prices of businesses may have declined, but not because of collapsing multiples of EBITDA or seller’s discretionary earnings (SDEs).  The multiples held firm; if the price declined it was because of a decline in EBITDA or SDEs, a natural result of a recession.  Similarly, during expanding economic cycles prices didn’t increase because of multiple expansion, but of increases in EBITDA or SDE.  And what about inflation, doesn’t this make the value of the real property go up?  Generally, yes.  But if inflation is accompanied by a recession, the two, business value and real estate value, tend to off-set each other, so that the net value of the business with the real estate is unchanged.  More important is the competitive position of the station vs. other stations in the market at the time.

One last glimpse into the future from our friends at Wells Fargo’s Economic Dept., this via their Animal Spirits Index.  (One of my favorite forecasting tools for the short to intermediate term.)

For those of you not familiar with the ASI, the Index consists of five indicators: the S&P 500 index, the Conference Board’s Consumer Confidence Index, the yield spread (between the 10-year and 3-month Treasury notes), the VIX Index (The CBOE’s volatility index) and the Economic Policy Uncertainty Index. The Policy Uncertainty Index was the sole driver of the ASI's headline decline in March.

The Animal Spirits Index (ASI) slid deeper into negative territory in March, falling to -0.24 from -0.22 in February.  Four of the five components contributed negatively during Q1, and the yield spread was the sole positive contributor. The ASI has now been negative in four out of the six past months, with negative values for the past three consecutive months. The slowdown suggests that confidence in the ongoing recovery has begun to fade, which is in line with our (Wells Fargo’s) below-trend GDP forecast of 0.6% for Q1-2022. 

Wells Fargo now expects the Consumer Price Index to peak on a year-over-year basis in March, and see price growth rolling over after the second quarter of this year. That said, they expect the rate of inflation to remain above the Fed's target through the end of next year. Higher inflation and tighter monetary policy are set to weigh on consumer spending and confidence. February marked the seventh straight month that inflation outpaced income growth. A key question is whether the labor market will remain strong enough for consumers to feel confident about wages and salaries even in the face of elevated inflation.

Market Comments, 3-13-22

How times have changed!  Last month all we were concerned about was inflation, COVID, supply chain breaks, fuel shortages, interest rates, immigration at the southern border, social unrest (crime), and a liberal federal government bent on transforming the U.S. into a socialist republic. But now we have a war to contend with!

So, what does that do to our market?  Connecting the dots into any sort of sequential cause-effect fashion is beyond the scope of this discussion, and quite frankly, our capabilities … and we suspect beyond the capabilities of even the best-resourced and capable computer programmers. The lack of verifiable information (mis-information, aka, propaganda), lack of continuity among the actors/decision makers, and allowance for unforeseen actions makes the probabilities of forecasting an expected horizon so low as to render the effort moot.

It's often said, “one of the first casualties of war is the truth”.

Markets hate uncertainty!!  We recall we’ve quoted that often since 2008-2010, again in 2020 (COVID), and now again.  In 2008 we pioneered through the Great Financial Crisis, and again in 2020 with COVID – both black swan events – and remarked at those times we’d never experienced such uncertainty since the stock market crash of 1987.  In my 40+ years of financial and investment market involvement, I’ve not experienced such uncertainty.

I suspect many of you reading this share these feelings.  

So, what to do?  Do we do nothing?  It’s not too widely known, or at least acknowledged, but many if not most of extreme financial gains come during highly uncertain (high risk) environments.  Buyers and sellers in these environments often find they have the market to themselves!  Many of their competitors have sidelined themselves. 

How to proceed.  We fall back to looking over our shoulder at the near-term past and limit ourselves to a near-term future.  Information is taken from grassroots behavior of market participants, e.g., buyers and sellers for sure, but also lenders, the Fed, other brokers(!), and potential buyers and sellers “waiting it out” (Some of these have been waiting it out since 2019!).

Analysis of historical financial information becomes of marginal use – the conditions in place then are not in place now!  And when might they return? Lenders may give as much credence to buyer’s proformas and assumptions as seller’s historical performance.  Lenders will still ask for historical financials from both the seller and buyer, but their decision process may be more future-based rather than simply extrapolating the past, plus adding a couple points for inflation.

And so, what has been the markets initial response to the uncertainty events?  As might be expected, buyer inquiries have shrunk but still trickle in, sensing a good deal may appear.  Sellers in most cases have not made responses yet to the events of the day … not sure what to make of it, or how it will affect their ability to sell. Lenders have not made meaningful overt moves, announcements, etc.  As of this writing, the war is only in its 17th day.

What do we know for sure? 

The Fed (FOMC) is meeting this week (the15th & 16th) with widely held expectations of a quarter-point rise in the Fed Funds rate,  taking it all the way to ¼%!  Wells Fargo’s economic group is forecasting a full 150 B.P. (1.5%) rise in this rate by the end of the year. (Note: with inflation at a 7.9% yr.-over-yr. rate as of Feb, a 1.5% Fed Funds rate is a real (inflation adjusted) rate of – 6.4%!! (In a normalized post-WWII economy, the U.S. real rate has been 3-4%.  Only 10% or so to make up!)  (More on this in our up-coming White Paper. If you don’t get our White or Blue Papers and would like to, give us a shout or email to request.) 

We’re a global economy.  Russia’s invasion of Ukraine will have the effect of siphoning off global GDP, including the U.S.  With pre-war supply chain breaks, we can reasonably expect the U.S. (and others) to slip into recession territory in a few months and likely through the summer.  This may not be formally announced until Q4-22.

The U.S. Treasury 2/10 bond spread has been used by investors for years (decades?) as a harbinger for forecasting economic changes. The spread going negative is the inverted yield curve talked about when forecasting recessions.

The S&P 500 is the stock markets performance relative to previous recessions.  As noted, this graph goes back to 1950.  Clearly events and the economic and market environments have changed during this period.  Human nature, our DNA, has not.  Public investment markets have been known and studied for years because of their transparency in observing human behavior.  Each buy/sell trade is a reflection of a human decision.

A lot, if not most, depends on “how goes the war”.  The Fed raising rates going into a  recession is classically bad economics. But as we’ve written for several years now, the Fed has no good choices, only less worse ones.  Raising rates now would be one of the worst ones. Stock and bond market investors beware.

Oil prices will likely continue to rise.  President Biden announced this past week sanctioning of Russian oil.  Russia produces about 10mm barrels per day, roughly 10% of global petroleum output. Wells Fargo Economics Dept. oil price forecast now looks for the price of Brent oil, a global benchmark, to average $140 per barrel in Q2-2022.  Oil being a global commodity, the re-routing of previously established trade relationships is on-going.  The completing of previously agreed to deliveries and beginning of new wellhead-to-refiner routes is expected to take a couple months, resulting in shortages in some markets and excesses in others. Volatility in pricing for crude as well as downstream distillates, including gasoline and diesel, should be expected to continue with a steadily increasing price trend.

Is there more?  Clearly yes! However, brevity and consideration for your time motivates us to conclude with this.  We currently have 2 transactions in escrow with 2 loans submitted.  Our lender is known to us with a 6 or 7 year track record of doing the hard deals.  It’s never done ‘til it’s done, but we’re optimistic. Listings tend to be scarce – they have been for a couple years, pre-COVID.  Many of the offerings that have come to market are priced reminiscent of CA ZIP codes. Many don’t sell, and those that do often result in buyer’s remorse shortly after closing.

Both sellers and buyers have a unique opportunity in this environment.  But to take advantage of the opportunity you need more than just information, you need knowledge, i.e., what to do with the information.  Perhaps we can help.

Market Comments, 2-10-22

The story behind the market the last couple years was the story of COVID, accented by the wide variety of global and domestic factors that have been identified during this period.  While still present, if even in a declining fashion, COVID has seemingly been replace in importance by inflation as a (if not the) cause for concern. COVID has not been the reason for the recent weakness in the recent Univ. of Michigan consumer sentiment indicator.. Instead, it’s been about inflation.  Some would say we’ve become COVID-numb.  Others would say we’ve had enough Government intervention in this matter.  Whatever your take, it’s becoming less important than inflation.(New to the importance of consumer sentiment and consumer confidence?  Note that buyers and sellers are consumers too; same attitude, different hat.)

And how does this translate into seller and buyer/borrower behavior?  Sellers who have largely faired well during the COVID period seem to be getting post-COVID anxiety – perhaps this is some of you.  Buyers, on the other hand, are becoming enboldened at the prospects of a post-COVID economic recovery.  Interestingly, both sides are looking at the prospects of $100/bbl of oil.  One side sees it as an impediment to the economy possibly leading to, or coincidental with, a recession.  The other sees it as indicative of an economy growing so fast that it’s creating a supply short-fall.

Speaking to oil supply:demand, this from Reuters Feb. 8.  

           As U.S. oil rises toward $100 a barrel, producers in some high-cost shale basins are buying properties and adding rigs and frack crews in                   places that fell silent when prices crashed early in the pandemic two years ago.

           Benchmark U.S. prices last week topped $93 a barrel, up around 65% in the last 52 weeks and the highest since 2014. U.S. producers are                 cranking up spending at double-digit rates as fuel demand has soared and fears have waned that OPEC will again punish them by flooding                 the market with crude that is cheaper to produce. (Emphasis by

So, on the supply side, how short are we of fuel? 

Gasoline stocks ran weak for most of the last 6 months as oil stocks trended down.  Both ran short for a few weeks at the end of last year.  This during a relatively weak and “iffy” economy.  If he economy opens up with the end of COVID protocols, it could accelerate demand well ahead of producer’s ability to ramp up production.  With inflation in the mix, this may translate into record level fuel pricing at the end user point.  The economy could accelerate quickly (consumers still have more than $1 trillion of “excess savings – left over from the various programs of COVID relief).  If this comes into the economy will still-in-place supply chain shortages, a recession could come upon us quickly. 

What does this have to do with buyers and sellers of gas station/c-stores?  More uncertainty, more risk. The take-away for sellers:  manage your cash.  For buyers:  keep your powder dry – avoid investment risk with the equity (cash) targeted for your down payment.

More on energy released today (2-10) by the Biden Administration:

          Today, the Joint Office of Energy and Transportation – a coordinated body of Department of Energy and Department of Transportation officials            designated to coordinate EV charging -- announced plans to implement the $5 billion for National Electric Vehicle Infrastructure (NEVI)                        Formula Program included in the Bipartisan Infrastructure Law that signed into law in 2021. The funding will be distributed to states on a                      formulaic basis and can be used to create EV charging station networks along Alternative Fuel Corridors. States will have until August 1 to                  submit plans for how they will use the funding, with the Federal Highway Administration and Joint Office of Energy and Transportation                          planning to approve state plans by September 30.

“Alternative Fuel Corridors”!  Does anybody know where these are?  It probably would be helpful if you’re in the gas station/c-store business.  Has the Administration designated these yet, we wonder?  Biden’s posture on petroleum-based transportation fuels is well-known, and this shouldn’t be a surprise, but we wonder if it will survive the mid-term later this year, and certainly the next general election in ’24.  Simply introducing more political risk into the marketplace.

Where might this cautionary note manifest first among the market participants?  We speculate from the lending community. It’s probably too early to see it show up in underwriting, but at some point, lenders will want to see existing or planned EV spaces on gas station properties. How they’ll fit on older properties may be a challenge, and new builds will likely run the electricity below the parking area to potential or proposed EV charging stations, so addition of the spaces “later” will be relatively easy. Might this disruption change the business model?  Absolutely.  The more challenging question is when.

A brief word about the “tremendous” GDP growth in Q4-21.  The economy exceeded expectations!  Annualized gross domestic product jumped 6.9% largely on the back of an increase in inventories. Personal expenditures (real economic growth) contributed only 2.3% and this primarily due to holiday spending that was spread throughout the period.

So, how’s the market digesting all this?  In big bites and rapidly as it comes along. We have yet to see any indigestion from the participants.  Lender interest (appetite for loans) is a good proxy for the underlying interest of buyers.  Many buyers rely, at least partially, on a lenders willingness to fund their acquisition, i.e., if the lender will put their money into it, it must be OK!  These folks apparently don’t recall the significance of the financial collapse of 2008-09.  Nonetheless, it’s still the case.  And lender interest is still high.  I still get a couple calls a week from BDOs (business development officers) wanting me to send them my next loan. There’s more than enough liquidity in the market to fund both acquisitions and re-fi’s.  And property values – lender’s collateral - are holding up, getting a perceived boost from inflation.  In fact, the demand for businesses that include the real estate are more in demand than businesses-only with a lease.

We’ll see how it plays out over the year leading up to the mid-term election in Nov.  The Fed of course is going to play a pivotal roll in the process as they reduce their balance sheet and raise rates.  Expectations are now for 4-5 quarter-point increases this year to keep inflation from going off the rails, with the first one expected in March – that’s next month folks. Those of you with variable rate SBA 7(a) loans older than 3 years may want to consider re-financing with fixed rate conventional loans. Variable rate payments will take the escalator up with rising rates.  We don’t think quarter-point bumps will do much to halt inflation.  Don’t be surprised to see a half-point increase somewhere along the line.  With inflation just under 7% and Fed Funds still at 0% (that’s zero), the real interest rate (inflation adjusted) is negative 7%!!  The 7% inflation number widely quoted is the CPI (consumer rate).  That same month the PPI ( producer price index – wholesale rate) was just under 10%!  That 10% rate will find its way to the consumer rate in the near term. The Fed, of course, is a day late and a dollar short!

Market Comments, 1-11-22

Starting off the year, I want to offer a comparative assessment of January ’22 activity vs. averages for the year 2021.  These are for MJG listings only. (Data by and
                                                                        2021                                       Jan. 2022


            Total hits for the year                      457,517                                        41,223

            Avg Hits/Mo.                                      38,126                                       41,223

            Avg Hit/Listing                                     7,856                                        13,744


            Hits for the year                                1,228,166                                  197,401

            Avg Hits/Mo.                                        102,347                                  197,401

            Avg Hits/Listing                                    21,587                                      39,480

            Avg % Views/Hit                                      3.5                                              3.2                  


We’re off to a good start for the year!  Buyer activity is brisk, a continuation of the latter part of ’21, except for a brief pause in the action during the Holidays at the end of December ’21.

Loopnet vs. BizBuySell.  Raw data bears out what we’ve known for years, and what many of you know or suspect.  Most gas station/c-store buyers come through the business portal rather than the commercial real estate portal, i.e., gas station/c-store buyers approach the market as buying a business with the real estate rather than the real estate that includes the business.  The meaning of the differences is much more significant than simply the choice of wording.

We’ve found after 23 years in the business, however, that most gas station/c-store owners search out a real estate broker or agent when considering selling rather than a business broker or intermediary.  We’ll spare pointing out the common differences in skill sets between the 2 groups, and simply say that the differences materialize in such areas as mis-priced offerings, mis-placed advertising, and sub-representation in dialogue with potential buyers.  Downstream risks and hazards may include broken escrows, mis-worded P-SAs and those that can’t be executed (The escrow agent should call these, but many times doesn’t, exposing the escrow company to litigation.), inability to finance, insufficient due diligence, post-COE latent discoveries of defects, and potential litigation. The differences work both ways, no just to the disadvantage of the CRE licensee.  Business brokers and intermediaries tend to be similarly disadvantaged in dealing with the real estate components of a gas station/c-store business that includes the real estate, and generally with similar unsuccessful results.

In AZ many of our buyers come from out of state. Many brokers wrongly believe  that if a buyer owned and ran a gas station/c-store in Kansas, Kentucky, Connecticut, or California, that they’re qualified to buy and run a gas station/c-store in AZ.  This is not the case.  Many if not most of the laws, rules, regulations and business practices of the gas station/c-store business and real estate acquisition are state or sometimes regional jurisdictions, not federal.  As such they’ll vary among states.  Many licensees will count on the escrow agent to see that the buyer is aware of, and complies with, all the needed documentation and business practices.  This is also not the case – it’s not their job!

So, what should we expect in ’22?  Continued uncertainty.

Inflation will be with us for some time, penalizing both businesses and consumers.  The Fed has painted themselves into a corner (after about 20 years of monetary mis-management!).  They’re not left with good and bad choices – only bad and worse choices.  With inflation at 7% (most recent level) raising rates has got to be an FOMC agenda item.  How fast and how high they can go without crashing the stock market is the question.  Fed and market watchers believe the Fed will court the stock market and try to curb inflation by drawing in liquidity, i.e., accelerating their bond buy-back program.  This is their current posture with the accelerated rate of buy-back scheduled to end by March, and a potential Fed Funds rate increase of ¼% to begin as early as that month.   The market is looking for three ¼% hikes this year.  This won’t be enough.  If we got all 3 increases tomorrow, that would take Fed Funds to ¾% in a 7% inflation environment – the proverbial drop in the bucket!  But to share the blame, it’s not just our Fed.  All of the G-19 nations have central banks that are similarly positioned, because seemingly they followed our lead in getting here.  We’ve talked of the Great Reset in our Blue Paper for at least a couple years now.  It may finally be upon us. 

Supply chain disruptions seem to trying to find solutions, but this will take a couple years (by smart people estimates) to cease to be a problem.  Globalization seemed to be great when all was working, but not we have at least the G-19 countries and many of the underdeveloped countries entangled in supply chain issues.  And to be sure, each country has unique COVID policies that keep a global recovery in the distance.  Historically, most if not all foreign countries looked to the U.S. for leadership in dealing with global situations, but sadly this is not the case with the current administration.  We may get some relief in the 2022 mid-term elections, but then again, we may not.  This introduces political risk into the economy, again, keeping uncertainty from this source in the markets.

Labor shortages will likely continue.  From all the “COVID stimulus” given to consumers over the past year or 2, there is an estimated $1.5 trillion stored away as “excess savings”.  Consumers, who are also potential employees, don’t need to go to work to live.  Dec. labor unemployment is now under 4%, generally considered “full employment”.  That is, all the people who want a job have a job.  But still, about everywhere I go I see help wanted signs. The problem is that the Government has boosted wage expectation via minimum wage to unsustainable levels for businesses.  If you own a c-store/gas station, you experience this.  Helping this unemployment level look good, however, is the participation rate.  Last figure was that this rate was down 2-3% from pre-COVID levels.  In raw numbers, this works out to be a million prime age potential workers who are not looking for work, therefor, not an unemployed statistic.  Within this framework, we still have the administration trying to force all companies with over 100 employees to see that they are all vaccinated or get fired (or get tested weekly – an unacceptable operational and financial requirement for the company). You can guess what would happen if this passes the courts and becomes law.

COVID, the grand wild card around which all of the above revolve.  Aside from the health issue, this has become the driver for public policy run amuck.  At some point the country and the world will reach herd immunity – it’s the nature of viruses.  Public policies dictating masks, social distancing, business, school, institution shut-downs have been shown to be ineffective.  Immunization may lessen the severity but doesn’t protect from getting infected, and can also contribute to herd immunity.  It would seem the primary purpose of COVD policies is to give Government a platform on which to act.  A beneficial aspect of the Omicron variant is its speed of transmission, and its relatively mild symptoms. This raises the rate of accomplishing herd immunity from this source with relatively low risk to the patient.

The market (participants) seems to have adapted to the fact that COVID is among us, much like the flu, and going about their business as usual, even if having to “mask-up” from time-to-time.

While the economy may be headed into a recession from the factors discussed above, the gas station/c-store segment of retail is seen as “recession-resistant”, and continues to attract buyers. Navigating the processes of selling or buying a business and/or real estate in the current environment will be a challenge in 2022, and likely in 2023-24.  Lenders can be expected to tighten the reins on underwriting, but there’s an extreme amount of liquidity available, not just from banks, but also private funds.  Conventional loans should be expected to have covenants protecting the lender in an assumed increasing interest rate environment, but these will have some degree of flexibility to them since lenders will be competing to place money in attractive situations.  This will not be as much the case with SBA loans due to Government guidelines. If considering an SBA loan, bear in mind that while the 7(a) loan has a 25-year amortization period, it has no pre-payment penalty after 3 years, and only 1% after 2. 

Market Comments, 12-6-21

Website market data from listings remains unphased by all of the negative social, political and economic news. Loopnet & CoStar data which is primarily directed at CRE has contracted somewhat, but still remains strong.  For our market, these are businesses that include the real estate.  BizBuySell that posts businesses with and without real estate shows a marked difference between businesses that do, and those that don’t, include the real estate.  In these cases, businesses without real estate have about 1.6 times for hits than those with real estate.  We believe this is primarily a statement on affordability.  
The allocation of values for businesses with real estate typically allocate about 2/3 – 3/4 of the total value to the real estate. For example, a gas station business that justifies a $1.5mm price including the real estate, would be priced about $375k-494k as the business only.  As inflation becomes more of the story about the economy (expected) we expect more demand for businesses that include the real estate.  As a side note to this, lenders are more favorably inclined to finance businesses with real estate than those without – better collateral.
Among the major developments recently that has hit the market is the announcement of the COVID Omicron variant.  This generated a volatility spike throughout the investment markets and the economic forecasts. It’s still too early to develop expectations for this, but last weeks downward spike in oil and the stock market was attributed to this.  Its widely discussed that much of the turmoil of this is from the politization of the discovery. Whether this serves as a cause to lock down economies or not, both globally and domestically, remains to be seen.

Consumer confidence ticked down to 109.5 in November. It’s too early for this slip to be attributable to the Omicron variant, though rising COVID case counts in November may well have been a factor. Also adding to the negative outlook is the GDP forecast decline and the inflation outlook..  Productivity down … CPI (inflation) up.  Not a good combination.  If these figures hold or worsen, it won’t belong before we’ll be seeing “stagflation” mentioned more often by economic and financial writers with reference to the ‘70s. (That’s the 1970s for you younger readers.)

On the positive side, lackluster employment growth is a sign of a tight labor market. Employers added 210,000 personnel in November, below this year’s monthly average of 555,000 jobs. Moving forward, a sustained period of elevated employment growth is unlikely. While there are 3.9 million fewer jobs than in February 2020, about 2.4 million people have left the labor force (lower participation rate), resulting in a low unemployment rate of 4.2 %.

November hiring highlights the strengths of the current economy. The transportation, warehousing, construction and manufacturing sectors created a combined 112,000 jobs in November. Growth in these fields reflects, among other factors, the ongoing demand for more residential and industrial space to support an expanding population that is relying more heavily on delivery. Added manufacturing positions correlate with greater U.S. factory output to suggest that supply chain disruptions are no longer worsening – doesn’t mean they’re getting better, just not worsening. Many retailers are nevertheless enlarging inventories to avoid future shortages, increasing the demand for warehouse space.

Labor-shortage-induced inflation has prompted the Fed concern. More job openings relative to job hunters helped drive average hourly earnings up 4.8% year-over-year. Ignoring volatility in the pandemic, this is the fastest rate of wage growth in over 10 years, further contributing to already steep inflation. Concerns over a spiraling feedback loop may accelerate the Fed’s timetable for tapering bond purchases and hiking interest rates. This would raise the cost of borrowing for real estate and private business investors, potentially affecting leveraged returns.

Within the region and locally,  52% of Californians surveyed in October 2021 view that state’s economic outlook over the next 12 months to be negative, expecting “bad times” ahead (source: Public Policy Institute of California). We continue to see the preponderance of buyer inquiries coming from CA.  While the economic outlook is what was polled, much of the economic difficulties stems from poor and punitive public policies at the state and local levels.  Not news!  What is newsworthy, however, is that the attempted recall of Governor Newsome several months ago didn’t motivate those in charge to change their political agenda.  We can expect continued buyer enthusiasm from this singular source for the next year leading up to the mid-term elections next November.

Markets hate uncertainty!!  We’ve broadcast this sentiment many times in this report.  Like many stimuli, however, if continued long enough the target recipients of the stimulus becomes numb to further stimulation.  We’ve probably approached this point with regard to COVID, southern border immigration, volatile oil prices, etc.  Lenders are people too!  Lenders are still flooded with an abundance of liquidity, even as the Fed continues to taper.  Underwriting standards haven’t gotten stupid yet, vis-à-vis 2003-2007, and are not likely too.  That fiasco is still too fresh in their minds to easily cause a repeat performance. However, they have raised the bar a bit, not so much in rates, but in terms. 

A note about SBA rates, since most business financing uses this type of loan – usually a 7(a).  The SBA rate is set as a function of the Prime rate, and the Prime rate is pegged to the Fed Funds rate set by the Fed.  This largely makes it insulated from market rate movements you’ll hear discussed when the talk is about the bond market, the housing mortgage market, consumer loans of various types, etc.  Lenders have some latitude in setting their rates, but the top is capped at 2.75% over Prime.  So, in a competitive environment, SBA lenders are operating in a limited rate environment. 

Market Comments, 11-3-21

Traditionally, strategic economic issues, data, and policies that normally have been beyond the horizon of these Comments have become day-to-day considerations since the start of the year.

Many of these affecters are dictated, or driven, by Federal Government actions and policies, either legislative or executive.  As such, we can’t adequately discuss our market without acknowledging Government actions, including the Federal Reserve (technically a private company).

Of the many economic & societal issues discussed daily, the two primary ones (our opinion) affecting the market for gas stations & c-stores, are supply chain constraints and inflation.

Economic recovery downshifted in Q3-21. GDP expanded at a 2.0% annualized rate in Q3-21 as a myriad of headwinds weighed on growth. Supply chain issues are hampering consumption (limiting supply) despite a record level of savings (increasing demand).

Additionally, government stimulus from early 2021 that fueled personal expenditures in Q2-21 had largely dissipated by Q3. Combined with a surge in COVID-19 cases that kept some people at home, these challenges made consumption the largest drag on growth in the summer period. Although some of these hurdles will persist, the outlook is improving as positive COVID test rates have decreased and the Holiday season is expected bring out more shoppers.

The economy has potential to break out. While significant, the anchors on economic growth are fixable and, given time (how much, we wonder), will be sorted out. The supply chain will untangle itself as the dozens of ships off the coast of Southern California are unloaded or redirected to available berths elsewhere. Although this process could potentially extend into 2023, longer port hours, relaxed container stacking regulations in Long Beach (OSHA will be all over this.), and “future adjustments” could expedite the process.

The labor market needs to expand. Currently, more than 10 million jobs are available across the country at a time when unemployment is below 5% (U-3; U-6 is closer to 8%). The source of this wide disparity is the rate of labor force participation, or those members of the population who are not working or seeking work. In January of 2020, the participation rate was 63.4% compared with 61.6% at the end of Q3-21. As wages continue to rise, some people who have dropped out of the workforce could come off the sidelines, lured by better compensation and a variety of available positions.  Supply constraints are clearly an impediment to fuller employment. 

The GDP data release also included data on the so-called PCE deflator, which is a measure of consumer price inflation.  The PCE deflator rose at an annualized rate of 5.3% in Q3-21, which boosted the year-over-year change in consumer prices to 4.3%, the highest rate since 1990. Wells Fargo’s forecast is that PCE inflation will slowly recede next year as supply chains become un-gummed. That said, we don’t believe that the rate of inflation will recede to 2% next year as some policymakers at the Federal Reserve expect. As we wrote recently, we expect the Fed to begin a tapering program of monthly debt purchases as early as December, and may be announced as early as today (Nov. 3) – see Highlights below. This is to reduce the Fed’s added liquidity to the market, and if scheduled as anticipated will run out by next summer.  This is not to say that they will concurrently increase interest rates. 
HIGHLIGHTS of the Fed’s announcement from today’s (11-3-21) FOMC Meeting: 

As widely expected, the Federal Open Market Committee announced that beginning this month it will reduce its monthly purchases of Treasury securities and MBS by $10 billion and $5 billion, respectively.

    * If the Federal Reserve maintains that pace of reduction in coming months, then it will be completely finished purchasing assets in June.

     * The FOMC continues to stress its belief that inflationary impulses are largely "transitory".

     * The Committee also kept its target range for the federal funds rate unchanged at 0.00% to 0.25%, and it expects to maintain this range until               "maximum" employment has been achieved.

     * Financial markets are fully priced for a 25 bp rate hike by late summer/early fall 2022, which seems a bit aggressive. Wells Fargo believes that           the FOMC will wait until 2023 before commencing a tightening cycle. MJG is expecting this sometime in H2-22.

     * We readily acknowledge that the Committee could pull forward its pace of tightening somewhat if payrolls recover more quickly than we                     currently forecast and/or inflation remains stubbornly high.

The stock market has had a muted reaction to the prospect of contracted liquidity.  The bond market, however, has seen a notable rise in short term rates – see graph below.  A direct interest rate rise would be expected to shake the stock market timbers! If inflation is not contained by next summer, expect rates to begin rising in H2-22.

And how does this translate into our market?

There is unprecedented  liquidity in the market.  Excess consumer savings left over from the various Government COVID stimulus programs is in the area of $5 trillion.  This money is looking to be spent or invested. The problem holding this money back from the economy is the supply chain log jam.  The result of too much money chasing not enough goods is inflation.  This will become more evident as we get closer to the Holiday Season. Sales will rise, but more goods (units) will not be bought. 

Observation:  Fiscal 2021 GDP came in at about $23 trillion. Consumer spending still is considered to be about 70% of GDP, or about $16 trillion for last year. $5 trillion in excess savings - savings over-and-above what are traditionally seen as normal as a function of other economic data – represent an increase of 31% in potential consumer spending. If released into the economy in a “short” timeframe, what do you think would be the inflationary drive from this?  This will be helped along (kept in check) by a continuing supply chain problem, but the faster we reinstate our normal supply lines and timeframes, the faster inflation will show up.  This may take until 2023-24 to work itself through.  Is this a “transitory” timeframe for inflation?  We, of course, don’t know.  However, we suspect the impact will show up in the ’24 election. 

Gas station/c-store business owners looking to expand, or relocate as are many cases we see from CA, can’t find “reasonable” candidates for acquisition.  When the need becomes strong enough, they’ll make the necessary accommodation, i.e., they’ll pay the higher price.  Pricing in the market today of many businesses, with and without real estate, is to the high side – sometimes very high side - of our valuation range.  Some are going to contract, and some are not. But all are getting a look-see.  Buyers are tripping over themselves looking for a “reasonable deal” – most have given up looking for a “good deal”. The sane voice of reason in this environment still tends to be the lender.  They’re trying to keep the lid on pricing.  But as high, or over-priced, properties find their way into the comps used by appraisers, increased values become justified.  (This is what happened in the blow-off of 2007, and lenders remember this.)  However, with all cash offers, or seller carryback financing, lender feedback is unavailable, and appraisals are oftentimes omitted.

Note:  Businesses sold without real estate are not recorded in public records. Hence, real estate appraisers don’t see them.  Business appraisers, however, use private company-based data bases that pick up business-only transactions.

Hot markets, and we resist the term, can look attractive to both sides.  But oftentimes are hazardous to either’s financial health. We’ve seen this in 2002-2003 (post 9-11), and again in 2008-2009 (during & coming out of the Great Recession).  If you’re in such a position and haven’t talked with us yet, may I suggest you give us a call.

Market Comments, 10-5-21

Today we noted that there are 18 gas stations with c-stores listed in Maricopa County on BizBuySell.  Of those, 8 include the real estate; the others are businesses only.

Pricing based on multiples of seller’s discretionary earnings (SDE) for businesses-only is looking a bit to the high side, but asking prices nearly always are.  Multiples including real estate, however, would lead a buyer to believe they are really located somewhere in CA. Many of these are not really priced on an income basis, i.e., they’re not profitable, or only marginally so.  They are really valued on a net asset value basis, or should be.

So, this is our baseline approaching the end of the year – only 3 more months folks!

Our focus here is not so much to report the past history, but to step out to the great 3-5 month unknown. What do we expect, and what, if anything, can we reasonably do in anticipation?

Markets hate uncertainty!!  We’ve reminded readers that continuously over the years, and today we have it in spades … Federal Government policies on any number of issues … COVID still with us in some variant and likely to mutate further … burdening to punitive energy policies stimulating inflation and threatening national security … global disruptions stemming from the Afghanistan withdrawal … trade issues with any number of trading partners (China being the most obvious & talked about) … U.S. immigration policies at the southern “border” (I use the term “border” loosely) … inflation … and Fed policies regarding money and the markets day-to-day response.  Given these and perhaps others, it’s somewhat surprising that buyers, sellers and of course lenders, can arrive at decisions.  However, we adapt … short memories of the past, and long horizons of the future.

On the economic front, small business confidence rose 0.4 points to 100.1 in August, as 5 of the 10 components of the NFIB Optimism Index improved during the month.  After plunging to its lowest level since 2011 in August, consumer sentiment improved only modestly in early September to 71.0 from 70.3 previously. In other words, consumers remain downbeat about current conditions. Higher prices for major household items and vehicles appear to be weighing on perceived purchasing power and continue to weigh on buying plans, which is a worrying development for the outlook of consumer spending if sustained. With 8 out of 10 components in positive territory, the Leading Economic Index (LEI) advanced 0.9% in August, the largest monthly pick-up since May. Despite a COVID resurgence and supply chain pressures, the message from August’s LEI report is that the economy is continuing to grow albeit at a more modest pace than earlier this year.  Consumer confidence dropped to a 7-month low in September as the Delta variant brought a spike in COVID cases. With no shortage of other factors to blame, such as wildfires, war, hurricanes and a border crisis, we see room for improvement in coming months. One silver lining: the share of consumers seeing jobs as plentiful rose to the highest level on record.

For the second month in a row, Fannie Mae’s expectations for near-term real GDP growth were revised downward – and outward – due to persistent supply chain disruptions and labor market tightness, according to the September 2021 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.  (Economists and economic groups both public & private are dialing back growth expectations.  Do you think Biden & Co. will change course heading into the  mid-terms about a year from now?  Political analysts are forecasting that for the Administration to “stay the course” is political suicide.  We’ll see.)

The ESR Group now projects full-year 2021 real GDP growth to reach 5.4%, percent, down from its previous forecast of 6.3%, anticipating instead that much of the previously projected H2-21 growth will take place in 2022. The group revised its 2022 forecast upward from 3.2% to 3.85. 

“Economic growth continues to be held back by supply chain and labor market constraints, both of which we expect to continue well into 2022,” said Doug Duncan, Fannie Mae’s chief economist. “We also expect inflation to remain elevated through much of next year, even if the crest of the recent surge is behind us.” (A big IF, here.)

What about CRE? Why are the multiples of businesses with real estate seeing prices increase vs. businesses-only with leases?  

This from some CRE sources. (Investment, or non-owner occupied commercial real estate.)

The Boulder Group’s Q3-21 Net Lease Research Report showed cap rates in the single tenant net lease (STNL) sector reaching a historic low for all three asset classes in 2021.

(REMINDER – cap rates and prices move inversely to each other.  Historic lows in cap rates translates into historic highs in prices … as a function of income (net rents).)  “Significant investor demand combined with limited supply of quality net lease assets remains the primary driver of continued cap rate compression (low caps) in the sector,” per Randy Blankstein, President, The Boulder Group. “Furthermore, during Q3-21 the yield in the 10-year U.S. Treasury decreased to its lowest levels since the first quarter of 2021.”

As pricing within the net lease sector remains at all-time highs; owners are taking advantage and adding properties to the market. Property supply increased by approximately 9% in the third quarter, driven by an increase in retail and office properties.

In the third quarter of 2021, less than 25% of the retail property supply had more than 15 years of lease term remaining which is below the historical average. High-quality tenants with long term leases experienced the biggest decline in cap rates (increase in prices). Investment grade-rated tenants including 7-Eleven & AutoZone experienced the greatest amount of cap rate compression for new construction properties.

We note a similar supply:demand imbalance with owner-occupied gas stations with c-stores, especially those including real estate in the offering.  This has served to raise our market multiples as a function of income to historic levels reminiscent of the 2004-2007 market.  (Yes, just ahead of the 2007-2008 financial market melt-down and following recession of 2009.  Are we forecasting a similar outlook?  Not likely – too many other factors in play at this time, and well beyond the horizon of this report.)

From the financial front, we’ve noticed lenders have started raising the bar on underwriting standards.  Not so much in stated interest rates, but in covenants (terms & conditions) put in place to protect the lender from the various potential risk elements, at least those that can identified!)  Most aggressive in this area are conventional CRE mortgage lenders.  Least showing signs of concern are SBA lenders, most likely because their loans are guaranteed by the Government.  They don’t want to be positioning to take loses, particularly Preferred Lenders as that would threaten their preferred status with the SBA.  And as most of you know, if you’re selling a business with the real estate, the most common loan used by the buyer will be an SBA loan.

Market Comments, 9-10-21

Market activity remains brisk.  Our grass roots poll of buyers shows that buyers are still hovering over AZ gas stations & c-stores available. Financing continues to be readily available – I suspect this will remain the case as long as the Fed keeps the Fed Funds rate at 0-1.4%, and continues buying Government bonds to the tune of $120 b/mo.  Excess liquidity among member banks is now ~ $1 trillion measured by nightly reverse repos.  And still the Fed prints!

DEMAND:  The city with the largest absolute increase in population between 2010 and 2020 is Phoenix, which grew by over 262,000 people. Phoenix is currently the fifth-largest city by population in the U.S. A simple connection of the dots would imply that more people mean more vehicles and more demand for fuel.  This has not been missed by current gas station operators in other states, particularly CA.  The impact of alternative fuel on the gas station is largely speculative in AZ, written about, forecasted, projected, but not materializing in any meaningful form. ( I’ve seen some shopping center parking lots with charging stations at some of the parking spaces, and I suspect some new-build residential developments are putting charging stations in the garage as amenities, but these are nominal in terms of petroleum fuel demand on a macro basis.)

PRICING:  The imbalance of demand over supply continues to encourage aggressive pricing.  Some pricing multiples of seller’s discretionary earnings suggests the businesses are actually located in CA ZIP codes.  Main street news of inflation’s progress inflames confidence in maintaining aggressive pricing.  Where lenders balk at LTV ratios, sellers seem willing to carry the second DOT (deed of trust) to complete the deal.  With institution investment/savings rates at 1% or less, a 2nd DOT at 5.5-6.0% seems compelling.  (SBA 7(a) rates with knowledgeable lenders continue to come out in the low 5’s (%) with a fairly low bar for credit risk.  All-cash buyers in this environment don’t carry the clout they historically had in beating the price down. 

 A PEEK AT CONSUMER CONFIDENCE:  A larger than expected drop in consumer confidence in August to its lowest level since February occurred against a depressing backdrop of war and pestilence (COVID Delta variant).   Consumer confidence dropped more than 11 points to 113.8, a larger drop than had been expected. There was no shortage of things to worry about, which weighed on consumers' collective psyche … the Delta variant has spurred state & muni governments to spring into action reinstating masks, safe distancing, and business restrictions & closures. Also, the U.S. actions in Afghanistan has given the country cause to pause when considering our international position, ally relationships, global trade positions, etc.  The cycling of COVID ups-n-downs with the emergence of variants may be with us for some time, and provides volatile economic data for the markets to digest and respond to, and consumer reactions accordingly.  Meanwhile, the COVID continuance will give politicians and policy makers more than enough opportunity to be seen as “dong something” to protect their constituents. (Recall that in less than a year we’ll be heavily entrenched in the mid-term election cycle.)

Meanwhile, political, social, and Governmental gymnastics notwithstanding, the small business market for sale and acquisition of well-priced essential businesses with real estate (the real estate perceived as an inflation hedge and desired collateral by lenders) can be expected to remain vibrant … as long as money is free, i.e., priced at low to negative real rates.  (The real rate is the nominal rate minus inflation.)  

Market Comments, 8-4-21

There’s been a divergence over the last 6 months (beginning of the Biden Administration) between what we hear about public policy, the economy, markets, etc. and what independent sources and relevant data report.  We review several private sources for content for these Comments as well as our Blue Paper, and look for private source comment and interpretation of public (Government) data and statistics. Historical data is always subject to revision is succeeding weeks and months, and forecasting public policy, including anticipating Fed policies and activities, leads to volatility in the metric.

We take a national, perhaps even international, perspective of the drivers of markets, and distill down to the effects on our market, the market of private gas station business and investment properties.  We believe that taking a micro look at the short term market data may be illuminating looking over our shoulder, but doesn’t serve well in providing expectations of the future, and sets us up for surprises, aka, black swans.

Conference Board's Consumer Confidence Index:

The Conference Board's measure of consumer confidence rose slightly in July, remaining at its highest level of the post-pandemic era. The gain was largely unexpected especially in the wake of the sharp decline in an alternative measure of consumer sentiment earlier this month. Although the conflicting purchase measures mean that the jury is still out on how inflation is weighing on consumers, optimism around business conditions, employment and expected income shows that consumers (your customers) remain upbeat. 

Inflation is still top of mind for consumer, although notably the forward-looking inflation measure came off the boil, if only slightly, with consumers expecting 6.6% inflation over the next 12 months in July versus 6.7% in June. Until recently we have been of a mind that after a year or more of putting their life on hold, most consumers were price-takers. In other words, people may grumble about higher prices, but not enough to put off spending.

With the resurgence of the COVID Delta variant, the Governments (Fed, states and munis independently, i.e., uncoordinated) have started instituting various restrictions on economic participants (consumers and companies).  These, if carried to previous extremes, can be expected to short circuit any economic recovery, leaving us again with low productivity and supply shortages, but now with high inflation. (This is starting to sound like Jimmy Carter’s government in the ‘70s.)  Several of the large cities in the U.S. have begun to re-institute restrictions under the banner of the CDC – others like-minded mayors can be expected to follow suit.  We’ll see.

Fuel Supply:

When the pandemic hit in the spring of 2020, Saudi Arabia, Russia, and the other OPEC+ countries implemented a production cut of nearly 10 million barrels per day by May 2020. The supply cuts, designed to drive the price of oil up, have worked. From a 4/30/20 closing price of $18.84 a barrel, the US oil benchmark (West Texas Intermediate) has quadrupled to $72.07 a barrel as of last Friday’s close (7/23/21). Now the OPEC+ countries will begin restoring all the output that was cut in 2020. They will pump an extra 400,000 barrels per day for the last 5 months of 2021, adding back 2 million barrels per day by 12/31/21 (source: OPEC). For the time being this has held WTI at about $70/bbl.

A glance at the charts above illustrates the volatility for feed stocks. These pricing dynamics are softened somewhat from the final end user by hedging activity on the part of producers. Crude prices drew hefty support in Q2-21 from U.S. inventory dynamics, with commercial stocks falling to their lowest since January 2020 and indications that the tightening is set to continue. Pricing and supplies, however, are based on a recovering economy with increased demand. Concurrently, the markets have seemingly got accustomed to the idea that there will not be any Iranian cliff-hanger as President-elect Raisi was to be sworn into office this week, mitigating concerns that Tehran might flood the market with incremental barrels. COVID headwinds persist, however, as several European countries see rising Delta variant cases.

A look at the recovering U.S. rig count, below, shows producers are ramping up for an expected and continuing economic recovery.  While well below pre-COVID levels, the trend is there.  With the time and money it takes to open or close a rig, these folks don’t react to every twitch of economic news or policy releases that come out of Washington, or are pronounced by any of the OPED+ participants.

Commercial Real Estate (CRE):

From the real estate market …The US commercial real estate sales market passed pre-pandemic levels in the Q2-21, according to Real Capital Analytics.

Activity in the second quarter surpassed the average deal volume trend for the second quarters in 2015 to 2019 by 14%, according to RCA. In addition, investment activity grew at a triple-digit rate compared to the pandemic-plagued second quarter of 2020. (EZ percent improvements since Q2-20 was so low … it’s the arithmetic!)

“In a sign of market strength, it was the sale of individual assets rather than portfolio and entity-level deals which spurred the growth,” according to RCA. “The dollar level of single property transactions in Q2 2021 was 17% above the trend seen before Covid-19 hit US shores.”

Another indicator of returning normalcy to the market: The US National All-Property Index grew 9.8% from a year ago and 0.8% since May. The index posted the most significant annual growth rate since 2015.

The Economy – What’s Behind the Numbers

Last week, the U.S. Commerce Department reported that Q2-21 GDP for the U.S. rose at a 6.5% annualized rate.

From 2009 to 2019 (the recovery from the 2008 global financial crisis), the average annual growth in GDP for the U.S. was 2.2%. So, in comparison with the previous recovery, 6.5% seems like exceptionally strong growth.

Of course, champagne corks were flying at The New York Times and other mainstream media outlets because Q2 output has regained 2019 levels. But the recession was (officially) over in April 2020. It's now August 2021, and they’re celebrating that we’re back to 2019 levels? That's a pathetic rebound and really nothing to celebrate.

Most analysts and media projected the Q2 number to be 7.5% or 8.0%, so it fell below expectations. Also, the Federal Reserve Bank of Atlanta GDPNow tracker for Q2 GDP fell from 13% in April, to 10% in May, and then 7.5% in June.  With allowance for noise, this means that growth weakened considerably over the course of the quarter. It also means if growth was stronger in April and May, and if growth for the quarter overall was 6.5%, then June must have been well below 6.5%. It’s the math!

That means Q3 is off to a weak start. With the Delta variant of the virus out there, the situation is even worse. Finally, there was some highly troubling data in the fine print that comes along with the headline number.

Imports were healthy because Americans have been on a bit of a buying binge, using government handout checks. But exports were awful, a reflection of the fact that the rest of the world is not doing nearly as well as the U.S. Simply put, foreigners are not buying our goods because they’re in bad shape themselves.

Most dramatically, personal income fell 30% on an annualized basis. This is a measure of private income that does not include government handouts. Most of this 30% drop was based on revisions to prior data, which had been updated by the Commerce Department using more reliable surveys.

Statistical adjustments aside, the bottom line is that private income (both wages and proprietor allocations) has been flat for eight months going back to October 2020.

That’s not a recovery; that’s a disaster. It makes the forecast more dire because one-by-one the government subsidies are running out.

The U.S. economy fell about 35% (annualized) in the first half of 2020 and then staged a strong comeback, rising 33.4% in the third quarter of 2020 with a more modest 4.3% gain in the fourth quarter.  For the full-year 2020, the economy fell by the greatest amount since 1946, but the second-half recovery kept that from being far worse.

Why wasn’t the 2020 economy much worse? The answer is that a huge number of financial rescue programs were put in place, backed up by tens of trillions of dollars of either money printing or deficit spending. (Inflation anyone?)

The Fed expanded its balance sheet by over $4 trillion in the immediate aftermath of the collapse. Congress approved trillions of dollars of checks sent directly to the American people. Unemployment benefits were extended and increased. Student loan repayments were deferred. Payroll Protection Plan loans were made to small businesses (and most were later forgiven).

But expanded unemployment benefits are mostly done. The Payroll Protection Plan loans are over. No additional checks are going to be mass-mailed, as happened last February and December.

With government handouts mostly over, private income stagnant and exports falling, it’s not clear what will drive GDP growth at all in H2-21.  To top it all off, the rent eviction moratorium is over – well not really.  The CDC jumped in a couple days after it was supposed to be over with a recommendation that the Government used to continue the moratorium until Oct.31.  At some time however …

One of the most effective and least reported programs was the moratorium on evictions of renters. This was a federal program, although there were many local equivalents.

Once renters knew they could not be evicted, they stopped paying rent. The program was so widespread that 14.7% of all renters in America now owe back rent. They’ll owe more come Nov. 1.

It would be one thing if the renters had put the monthly rent money in escrow so that it would be available when the moratorium expired. That’s unlikely to have happened for more than a few of the six million families covered by the program.

A three or four-month moratorium on eviction starting in April 2020 might have made some sense. But running the program for 15 months, now 17 months, with no plan for a smooth exit has led to another potential crack-up for an economy still not up to speed, and likely to be worse in November.

People naturally sympathize with the renters who were affected by COVID. However, little consideration is given to landlords. Many landlords have mortgages and had to pay principal and interest to banks, plus maintenance and property taxes while their tenants were paying no rent.  Now those landlords want to collect the back rent in order to get caught up on their own obligations. Many tenants just don’t have the money. What comes next is a wave of evictions.

This will put an enormous number of Americans out on the street looking for new places to live without much money in their pockets. It could also lead to a depressed housing market in certain cities as a surge of rental properties comes on the market while people are fleeing the cities to move to suburbs or more attractive states like Florida, and of course AZ.

This will be one more headwind for the economy, as tenants struggle with housing costs and landlords struggle with a surplus of property for rent. It’s one more example of the unintended consequences of government intervention.

The Privately Held Gas Station/C-store Market:

Our market remains brisk.  Buyers don’t seem to be reacting to many of the comments made above.  Sellers and seller’s brokers are pricing properties and businesses like we’re California-East, i.e., multiples are anywhere from 30-50% above historical measures.  Many of these, we believe are priced for inflation to catch up with them and justify the higher price.  We’re not sure how many of these sell, vs. simply being delisted after not selling.  We still have scarce inventory, and generally poor quality of those offers that come to market. Buyers remain frustrated by not being able to find “reasonable” acquisition candidates.

Lenders remain active, measured by the number of cold calls I get a week from BDOs at banks wanting to loan on MJG listings they find on Loopnet, BizBuySell, etc.  What we haven’t seen yet is lender terms on conventional loans reflecting lender concern about inflation.  We can still see 5-year fixed rates, or 10-year fixed for 5 then adjusted for the last 5, with amortization periods up to 20 yrs. We anticipate these will change over the next few months as inflation becomes more known and entrenched.  As long as the Fed keeps Fed Funds at 0-1/4%, the initial rate may stay in its current range, but variable rates and adjusted rates will begin to show, as well as shorter terms.  We believe lenders are poised for this, just not pulling the trigger yet.

In case you missed it …
                                         Underground Storage Tank Site Improvement Program (TSIP)
                                                                    Application Period Opening Soon
                                          ADEQ's Tank Site Improvement Program (TSIP) will begin accepting

                              applications for financial assistance for Fiscal Year 2022 from Aug. 23, 2021, through Oct. 8, 2021.

We suggest that if you want to apply for this grant, you contact an environmental consultant to write your application.  These companies will consult with you to select contractors, equipment suppliers, etc.  If you need referrals to environmental consultants or contractors, please contact us with your request, or for discussion.  If you haven’t started this process yet, you’re already behind!  The market is swamped with this activity.

Market Comments, 6-4-21


                            This just in!  I’m pleased to announce that I’ve been awarded an industry Expert status by the Business Brokerage Press (BBP) in                                 the gas station/c-store business segment. This is a national recognition, of which I’m 1 of 8 recipients nationwide.  This is my 14th                               consecutive year receiving this recognition.  To learn more about BBP, go to

Everybody’s busy since everything takes longer to get done in the COVID, dare I say post-COVID, environment, and it’s hard to find time to read news briefs, information digests, etc., so I’ll get to the main points. 

The market for selling gas station businesses and properties is good-to-excellent.  Buyer demand is maintaining and sellers have begun to step forward.  Previous Comments anticipated this several months ago … and here it is!  Multiples of SDE/EBITDA have surged in asking prices – sellers influencing the pricing arithmetic coming off a good year (2020) in many cases trying to capture the momentum.  Where 2020 wasn’t such a good year, sellers are selling into  ’21 Y-O-Y improvement in financial performance.  Either way, multiples are up. 

For their part, buyers seem willing to buy the higher market prices – buyer demand is strong. (“Get me out of CA!”)  Lenders have not stepped up to participate in some of the higher priced deals, but buyers and sellers seem willing to close the gap with either more down payment, or sellers carrying a 2nd. 

Money (financing) is plentiful, but not free, and not for everyone!  Rates have bubbled in Q1-21 in response to the surge in the 10-yr Treasury since Q4-20. (More on that below if you have the time.) Lenders are still looking harder at the quality of the sponsor (borrower) than the fundamentals of the deal. Borrower solvency is important, but liquidity is paramount. 

For Readers with a Bit More Time, Please Continue - Reading Tea Leaves

“Apple is finalizing plans to bring its workers back into the office, albeit under abbreviated circumstances, underscoring the increasing role high-profile tech giants play in establishing a blueprint for corporate America in returning employees to workplaces as the pandemic shows signs of easing.” (Source:  Co-Star, 6-3-21)

So, as Apple goes, so goes the world?  Used to be IBM held this pinnacle … “used to be”.  Time marches on!  However, in a world looking for leadership to get back to normal we don’t turn our backs on that from any quarter. Many, if not most, don’t expect normal to approximate pre-COVID in any arena, including CRE and private business investment.  The big-to-in-the-water approach to transaction development is representative of the current social, economic and financial uncertainties, pricing discovery among them.

Pricing discovery is as dynamic as I’ve seen it, matching or exceeding the uncertainties coming out of the 2008-2009 recession.  The data points are there, but they’re disconnected and un-synced.

Inflation is a prime contributor to the confusion. Much of the talk of inflation has to do with rapid price increases in consumer products. To the Fed’s credit, their pronouncement that this is likely transitory is probably right – its pent-up consumer demand laced with all the free Government COVID relief money, chasing too few products due to the economic shut-down – supply chain interruption - that is just now beginning to come back to life.  The re-emergence of the economy may take through the end of the year, or into next. At some point the Government’s willingness to keep the free-bees coming will have to be curtailed. Cutting back free money and bringing supply back up to demand will de-fuse the current spike in prices, i.e., inflation. You’ll be able to tell when this is happening by watching the 10-yr. Treasury performance.  Expect that rate to begin to decline again, ultimately to retrace below 1%.  Frame of reference:  From the low yield of 0.508% on August 4, 2020, the 10-year note yield peaked at 1.745% on March 31, 2021.

But still lurking beyond current consumer enthusiasm, however, is the huge pool of money supply that has built up over the last year directed at supplementing (stimulating) a COVID-damaged economy. A large amount of this (estimated at about 30%) has  been idle, used to pay down debt (by consumers), added to savings, or tucked under the mattress as rainy-day money.  Statistically the velocity of this “excess savings” has not been spent, which is what is needed to contribute to inflation.  If consumers figure the rainy-day has passed, this money may find it’s way into the economy and add to inflationary pressures.  How much, how long, how fast … don’t know!

However, as interest rates come down, inflationary expectations will subside, and consumer prices will settle down, and likely as not decline a bit.  This will take some of the heat off of market multiples for asking prices, and provide a more stabilized and historically-structured market.  I don’t expect actual sale prices to decline much, if at all.  The normalization of the economy should result in increased overall business, including stable profitability.  This will support the actual price paid even if multiples sag a little.  Buyer confidence should be expected to improve. This may result in resurgence of inflation as more confident buyers begin to spend previously locked up money. 

It should be a brisk summer. 

The above scenario is dependent on how much the Federal Government participates in the normalization process.  If it continues to interject socialistic policies into the capitalistic economy, confusion and dislocation will be sustained longer. 

Market Comments, 5-5-21

My secretary, Misty, brought me a petition justifying her skills to write you her thoughts on the market.  While only 3 (21 in dog years), she’s in my office daily overhearing my phone calls, listening to my comments on the hundreds of emails I get, and capturing the essence of my ramblings while structuring spreadsheets, fliers, etc.  In spite of the evidence of her similar K-9 associates, I don’t think she’s quite ready for primetime. So, I’ll be authoring this and the next several issues until her in-house research memos pass muster.

But this raises the question … Do you know who’s sourcing your research? 

​After staying below zero for a year, the Wells Fargo Animal Spirits Index (ASI) turned positive in March. All five components contributed positively over the month, indicating widespread optimism. This strong reading is just the latest piece of data pointing toward an accelerating economy. Much like the broader recovery, the ASI's turnaround is the fastest in decades, with the index returning to positive territory after just 12 months. By comparison, the ASI took after 75 months (6 ¼ yrs.) to turn positive after the Great Recession, and 33 months after the 2001 recession.

We monitor this index because it’s a single encapsulation of the emotions and attitudes of investors, business owners, and decision makers.  It includes among other indicators the Consumer Confidence Index.  We think this is a “best read” of the pulse of the market.

The index had been negative since the start of the pandemic, as any improvement over the last year proved fleeting and successive waves of COVID prevented the return to normal economic engagement. While the virus is still prevalent, the accelerating pace of vaccinations provides some reason to believe the recent improvement in sentiment could prove durable.

Financial markets continued their steady advance. The S&P 500 index notched another all-time high, while the VIX (short-term volatility index of the S&P 500 – one estimate of market risk) hit its lowest monthly average since January of last year. The yield spread between the 10-year and 3-month Treasuries increased as markets continued to price in higher inflation and expectations of further fiscal stimulus. The Economic Policy Uncertainty Index dropped to 140.8 in March, the lowest level since January 2020. Consumers’ perception of the economy improved rapidly in March as COVID case counts dropped and the labor market recovery picked up momentum. The Conference Board’s Consumer Confidence Index jumped to 109.7, the highest since March 2020.  We’ve all heard by now that Q1-21 GDP came in at 6.4% (annualized) growth, the highest in decades.  It’s fairly common now to see 2021 GDP forecasts of 6-8% increase for the year.

The labor market recovery has begun to accelerate, with 916K jobs added in March, and the ISM indices for the manufacturing and service sectors hitting 37- and 24-year highs, respectively. Labor hit a speed bump, however, in April.  Forecasts were for jobs to increase 1mm (yes that’s a million) but the jobs report came in at only 266,000 – just a bit off!  Yet, unlike last year when re-openings led to a mechanical jump in various indicators as the country exited lockdown, sentiment is now improving. Rising animal spirits, in addition to historic fiscal stimulus and an improving public health picture, underpin the expectation for further improvement in economic activity over the coming months.  It’s going to be a choppy ride.

Small business leaders, however, are more cautious in their optimism than the ASI would suggest. The National Federation of Independent Business' (NFIB) Small Business Optimism Index rose 2.4 points to 98.2, which brings the index back above its long-run average for the first time since November. While the improvement is encouraging, this past month's rise was less than expected and is in sharp contrast to the more significant gains seen in many other economic indicators. Seven of the 10 components of the NFIB survey increased in March, led by an 11-point rise in the proportion of business owners expecting the economy to improve and an 8-point rise in expectations for sales. Both series, however, remain relatively low. Plans to increase staff rose 4 points to 22%, but business owners continue to report extreme difficulty in filling open positions and rising wage pressure.  (They’re competing with the Government’s free hand-outs for not working!)

Having diverse market data and opinions in this post-COVID recovery environment should not be surprising.  Markets hate uncertainty!  And uncertainty we’ve had by the bucket-loads for the last 100+ days.  Although COVID data may be expected to improve as vaccines continue to be administered, the daily policy salvos out of Washington will likely continue unabated.

The take-away from all the economic market data is that the market – our market – is trying mightily to breakout of a Government-induced mask-wearing slumber.  Much was made of the consumer spending in Q1-21 GDP growth. I heard an interesting term last week with regard to the consumer’s contribution to Q1 GDP:  “excess savings”.  It wasn’t defined, but seemed to bear a relationship to stimulus payments received but not spent.  The figure mentioned was something over $1 trillion!  If so, those sensitive to such things will recognize that the money the consumers spent was from the Government via one of the many stimulus plans.  Hence, it was Government spending under the cloak of the consumer.  Does this matter?  We argue yes. It begs the question, at what point will the Government stop, slow, or re-work the Government payments?  Under the current administration, that may be never, or at least not until Nov 2022.  But since our Comments here have a short-term focus, we won’t peer over that further-term horizon.

As suspected last winter, sellers are now beginning to step forward with inventory.  While not a flood, it’s encouraging to see some balance to buyer interest.  Always a primary factor in valuing for the market, today price discovery is a major consideration.  Lack of sales over the last year or so mitigates the effort of pricing to recent (comparable) sales.  Pricing for capitalization of the income stream brings into question how to handle 2020 financial performance.  Some businesses had banner years in 2020 (which sellers would like to emphasize), and some were off as much as 50% (which sellers would like to forget).  In either case, how do you adjust valuations to reflect this?  Much depends on whether you’re the buyer, or the seller … or the lender.  We believe it will take most of ’21 and likely into ’22 to develop enough “non-COVID” data to get across the valley (or over the mountain).  Incidentally, lenders and appraisers are dealing with the same problem.

The credit markets don’t seem to be an obstacle at this time.  I’ve been getting a couple-three calls a week from lenders looking to place money, i.e., make loans.  The tone of the calls suggests lending parameters are softening … a lowering of the bar.  Interest rates seem to have bubbled a bit, but not to deal-breaker levels.  They’re definitely heeding the lead of the bond market rather than standing pat with the Fed. (Not a surprise here.)  With inflation showing its hand (to everyone but Powell & Co.) expect further rate increases as the summer unfolds. 

J. Powell (Head of the Fed) has stated repeatedly that his primary determinant for raising rates is unemployment.  At last check the difference between U-3 (low 6%s) and U-6 (mid 11%’s) gives at best a false reading, but U-3 (popularly quoted) serves to present a positive spin – as of end of April was 6.1%.  However, we note a structural fly in the ointment not spoken of in this context: What about the illegals coming across the border?  At the current flow they must be worth at least several basis points in unemployment, if they’re counted … another problem.  As disbursed across the country, different states will account for them differently.  Where and when (or if) do they become part of the employment/unemployment picture?  Of course, we don’t know – another wild card.  However, if this is the arena Powell is looking at for signals of inflation – a tight labor market – we may well have inflation well-entrenched and going strong before he looks over the other side of the fence.

But will this affect us … our market?  Only to the extent that inflation affects interest rates, and Fed QE-style bond purchases affect liquidity, but other than that, not so much!

Market Comments, 4-7-21


A brief scan through a couple of my favorite websites for gas stations & c-stores showed the following listings for sale – Arizona statewide:

            Biz Buy Sell:  22 available.  Most had businesses with the real estate.  Some were offered & priced for the business only, then showed the real estate available for an additional amount. Pricing on viable operating gas stations, with or without real estate, suggests they’re really in a CA ZIP code.

            Loopnet:  57 available.  This was largely a contaminated grouping, i.e., there were more plain retail buildings, strip centers, closed gas stations, mechanical repair buildings, some carwashes (no fuel), etc. than there were gas stations with convenience stores.  Bear in mind Loopnet is primarily a CRE site, not for businesses.  They’ll accept business listings if they include the real estate.

The sum of it is that there is little inventory, and what is available is hard to find, and priced dearly. We’ve had poor inventory since before COVID, but this is as poor as it’s been this cycle.

I say this cycle, because we had a similar market, although with different conditions, back in about 2003-2007.  I suspect product will start to surface again by H2-21, possibly as early as Q2.  The recovery will be driven by the success of the COVID vaccines and the subsequent opening up of the state economies, which should not be expected to be simultaneous or even synchronized. 

Fiscal and monetary salvos continue being launched from Washington with unsettling effect.  This strains the optimism of the most stalwart consumer/employer/tax payer.  We won’t see what the real economic response will be until all the stimulus packages and accommodations run their course.  If the Biden Administration’s Infrastructure Program is signed into law, the U.S. will have spent nearly $10 TRILLION in a single year.  This number is:

     Equal to the GDPs of Japan, Germany and the U.K. combined.
     More than the U.S. has spent during the last FIVE recessions combined.
     More than the combined annual wages of all Americans.

A fundamental question occurs to us:  Can we transition to a capitalistic economy (again) from the socialistic (Government paid for) economy that we’ve been enjoying for the past 3 months before the bond market raises its required rate for buying the next Treasury auction?  Of course we don’t know, but this is becoming more than a conceptual question.  And what if the next auction is undersubscribed?  Katy bar the door!!!

When considering interest rates, we have to be cognizant of the Fed’s posture, even though historically they’ve missed the boat consistently since the ‘70s.  From the recent FOMC meeting, the Fed is telling us only 4 of its members see rates rising next year ('22), and none in ’21.

However, the market continues to assign close to an 80% probability of liftoff in 2022. It’s important to note that the Fed will not raise rates while conducting QE. It means that the central bank will need to announce tapering as soon as late this year to gradually reduce securities purchases. Given the Fed officials’ statements, that seems unlikely.  If the bond market stops supporting the Fed’s money printing via Treasuries, might there be a surprise announcement of a rate hike without the customary warning?  It’s happened before!  This then would be a Black Swan that we never want to see. There is a clear disconnect between the markets and the Fed’s communications, i.e., the Fed isn’t listening.

Fed Chair Jerome Powell has maintained a calm exterior when discussing rising interest rates.  Powell believes the spike in inflation that often accompanies an economic recovery will be short-lived this time and not significant. Investors aren’t convinced Powell is right, as the selloff of long-term Treasuries continues. Their concern: the surge in government spending coupled with a vaccine-driven increase in consumer spending this summer will result in inflation and force the hand of the Fed to play catch-up with multiple rate hikes.

Mr. Powell has stated repeatedly that a, if not the, primary indicator the Fed will use to que a suspected rise in inflation is the labor rate.  A tight labor market (low unemployment) is needed.

Inflation – What to Expect:

But is this really a tight labor market with unemployment over 6%?  (The popularly stated rate of 6% is the U-3 rate; the more accurate and usually unstated rate is the U-6 rate, last checked a couple weeks ago at about 11.5%.)  U-3, U-6, or other calculation notwithstanding, we have over 11 million able-bodied workers idle.  How can we have a tight labor market with so many workers unemployed?  Simply stated, it’s “structural unemployment” … unemployed workers don’t have the job skills for the jobs available.  This anomaly was most recently highlighted by V.P. Harris’ suggestion that all the workers losing their jobs by the termination of the XL Pipeline should be re-employed making solar panels!  We’ve been here before, and our previous experience shows us that structural unemployment takes time to cure.  This time may well give inflation a running head start before the Fed acts … terminating liquidity provision programs and raising rates. Might the Fed indeed fiddle while Rome burns?  They have before.  Since the late ‘60’s-early ‘70’s the Fed has consistently been behind the power curve. Should we expect anything different now?  

All of this is impacting the short-term horizon of our market … the market for buying and selling gas stations.  It doesn’t seem to be tempering investor enthusiasm, but is throwing cautionary cold water on decision-making.

On the supportive side of transactions, credit interest rates are remaining low in spite of what can only be described as a bond market explosion … in rates … prices tanked.  The 10-year Treasury about doubled since August, from 0.91% to 1.72% as of April 2.  Meanwhile mortgage rates are firm, maybe up a bit on conventional loans, but largely unchanged. Lenders are tightening the terms, raising the bar, and decreasing LTVs 5-10%, but unless the deal was thin to begin with, these aren't deal-breakers. 

Also, there’s a lot of cash parked for the rainy day, or the screaming good deal that can’t be passed up.  Not too many of these around yet, but what constitutes a good deal is largely subjective, in spite of the analytics that surround the negotiations. 

Gas station dealers on balance had a banner year in 2020.  A different business model to be sure, but record high bottom lines.  Stations that may have otherwise come to market for sale have been held back so the owners can continue to enjoy the unprecedent profits.  Might they be holding on too long?  Its likely! 

Translating COVID improvement into market activity, we suspect listings will begin to materialize later this spring or into summer as the economy “normalizes”.  If you’re a seller, you can sell now into a seller’s market.  A normalized market favors neither side.

Market Comments, 3-13-21

Those of you accustomed to receiving this Report on a monthly basis will recognize its absence over the past couple months … since the Presidential election and through the first 7 weeks of the new Administration. This was not an oversight, but an intended delay.

With the continued uncertainties of the COVID-driven economy, the added confusion and additional uncertainties from the election followed closely by Biden’s early activities post-inauguration were too much for the markets to digest in any meaningful manner.  Just so much noise!

However, the dust has begun to settle and a dim horizon is coming into focus.

So how has the consumer weathered the storm?  (We’re all consumers, even gas station buyers, sellers and investors.)  The University of Michigan's survey of consumer sentiment jumped to 83.0 this month, its highest level since March 2020 . With more fiscal stimulus on the way and the tide turning with the pandemic, we fully expect a continuation of this upturn in consumer confidence. The $1.9 trillion fiscal relief package became law yesterday, and some stimulus checks will hit personal bank accounts as soon as this weekend. Aside from the longer-term impact of the Government printing & spending money, the short-term impact can’t be ignored.

Considering commercial real estate (CRE), average asking prices per square foot across all CRE property types dropped the most in February since the pandemic began a year ago, according to new data released by commercial database CREXi. Newly listed asking price averages decreased 7.34% over January numbers, owing in part to some listings being marked as “unpriced,” while square footage across asset classes rose by 11.2%. 

“Just as in the early months of COVID, sellers and brokers are preferring to use the market as their pricing mechanism to begin the negotiation,” CREXi analysts write in the firm’s National CRE Report for February 2021. “This trend had been generally reverting back to pre-COVID levels of unpriced listings, but seems to have returned in earnest in February.” This will be most interesting to gas station  investors, not so much for owner-operators.  (Privately owned small businesses price by a different mechanism than investment CRE.)

Although small businesses and CRE are different markets, its notable that the investment CRE market is coming to life also.

The US economy showed its clearest sign yet of recovery with February’s unemployment report released earlier this week by the BLS: Some 379,000 jobs were added to US payrolls last month, led by the leisure and hospitality sectors.

To be sure, the jobs market is nowhere near its pre-pandemic health. First-time unemployment claims totaled 745,000 last week, up from 736,000 the week before, while both the unemployment rate, at 6.2%, and the number of unemployed persons, at 10 million, changed little in February. Although both measures are much lower than their April 2020 highs, they remain well above their pre-pandemic levels in February 2020 (3.5% and 5.7 million, respectively).

All that said, the gains in February were very telling, particularly for the CRE industry. There were 355,000 jobs added in the leisure and hospitality sector; in the bar and restaurant sub-sector alone 286,000 positions were added. This is a strong signal of the service sector reopening.

The new positions at bars and restaurants are in part a reflection of relaxed restrictions on dining that took effect last month, particularly in California and New York, according to Marcus & Millichap Research Services, but they also signal the beginning of a more robust stage of employment growth after a pause in the recovery late last year. “The positive momentum, aided by ongoing stimulus measures, speaks to the underlying demand and resurging confidence in the retail and hospitality sectors that were most impacted by the pandemic,” it said.

I speak of momentum often.  Entrepreneurs, business owners, and investors are a forward-looking people … “the trend is your friend” … “don’t fight the trend”.  Markets discount time.  We don’t invest by looking over our shoulder (or shouldn’t), but by looking forward. For this to work, however, requires a stable continuum of the environment – markets don’t like change, disruption, surprises.  All these things interrupt confidence, and break the momentum.

Markets continue momentum by improving on the things that give us our confidence.  Perhaps at this time its more favorable reports of COVID data.  Will more socialistic programs and bills before Congress be seen as favorable improvements?  Ask somebody who’s getting the next $1,400 check.  We’ll see, but keep an eye on the horizon for the next black swan. The next threat to momentum that’s begun getting some press lately is inflation.

We’ve been writing about this for some time, ever since the Fed’s debt-to-GDP ratio passed about 105% a few years ago.  Keep the money printing going and it’s just a matter of time.

As long as the Fed’s money (QT, etc.) was going to Wall St. inflation remained in the public markets (30,000 on the DOW). But now with all of the COVID Relief programs the money is finding its way into the real economy. The difference:  the velocity of money.  If you take “extra” money & put it in the market, in the dog house or under the mattress it has no velocity, hence, no inflation.  But put it into the economy, e.g., via stimulus checks to the world and you get velocity, and then inflation.  This is where we’re at.

 Inflation is what happens when real assets adjust (re-price) for financial assets. Real assets: real estate for one, also precious metals (gold, silver, etc.) and commodities in general.  Financial assets:  stocks, bonds, essentially financial contracts or evidence of ownership. If you’ve been to the grocery store lately – or gas station! – you’ve experienced inflation.  I was told today that rack rates for unleaded (87 octane) are over $3.00. To have the Fed tell you we don’t have inflation is denial on their part, and more that a bit insulting to consumers. 

The bond market has already reacted to the above data.  Perhaps you’ve heard, although it doesn’t get the press that the stock market gets. The bond market traditionally has led the stock market by a considerable amount, up to 2 years.  

A brief glance will tell you the 10-year Treasury has about doubled in the last 6 months.

I’ll have more on inflation, Fed policies and the bond market in our up-coming Blue Paper.

And so, what does this have to do with the market for buying and selling gas station businesses?

Since this Report deals with the short-term horizon, 3-6 months, we’ll limit our comments to this period.

Buyer activity took a pause during the first few months of 2020 while we were figuring out how to handle COVID, then during the summer broke out to new higher levels of activity.  For Californians I believe this was as much an effort to leave the state than business or financial reasons.  Buyers again took a pause about a month before the election, and for the first few weeks after, but now again have returned to active. This most recent spike having to do with what is perceived as radical, unsettling policies coming out of Washington, and yes, continued turmoil at several state levels. Their motivations notwithstanding, buyers are back.

Lenders, the other part of the buy equation, have been largely unresponsive since H2-20. About Q2-20 most ratcheted up the lending criteria, not so much pricing.  Interest rates that have their basis a legislated rate, e.g., prime, have been marked up selectively by asset class (type of real estate, and the type of business conducted on the property).  Lenders have put more of the underwriting burden on the basic creditworthiness of the borrower. Interestingly, gas station properties & businesses are considered to be a desired asset class in the COVID environment.

If the bond market keeps pricing rates up reflecting anticipated inflation, at some point the Fed will have to capitulate and begin raising Fed Funds. They will also be called to this by the continued weakness of the dollar. This will not be received well by public markets! Whether they can hold this off until the end of 2022 as advertised is considered by many to be doubtful.

Our market will continue to improve over the short-term.  Previous run-ups in gas prices as we are experiencing now have served as a magnet for buyers.  This is won’t be an exception, but will provide another reason for new entrants to want in.

Sellers, don’t get carried away with pie-in-the-sky pricing.  Lenders will remain a governor keeping a lid on run-away pricing.  They don’t want a repeat of 2005-2008.  For owner-operators selling a business that includes the real estate, the price rises will be from the real estate, not from the business component.  Lenders for investment real estate that would typically loan up to 60-65% LTV have now whittled down to 50-55%.   Expect a similar reduction when financing the business, with or without the real estate.  Other terms may also get tightened.  Tightening terms puts a greater burden on cash flow to meet debt service coverage ratios.  Lenders know this, which is why they’re paying greater attention to the strength of the borrower.

Market Comments, 10-9-20

“The markets recovering” he said. 

“No it isn’t.” came the reply.

They’re both right!!  Seems we’ve been talking about bifurcated, and in some cases trifurcated, markets since the 2010 Great Recession recovery. And we’re at it again … bifurcation.  But the salient question is ... what are the lines, boundaries, and segments of bifurcation?  Today they’re dictated by the pandemic.  Essential businesses, and the properties they occupy, are doing well in the market – being bought and sold.  Non-essential businesses and their properties are struggling and languishing in the market.

MJG, gas station business and real estate are selling and in demand, even more so than before the pandemic.

What are not seeing activity – yet - are dark properties for redevelopment and land.  There are a couple events on the near term horizon that could change this in a hurry: 

1.  the election (now less than a month away), and

2.  the actual release of a COVID therapeutic, and/or a preventative vaccine, the latter frequently advertised as “coming soon”. 

We won’t offer speculation as to the outcome of either event, only to note that there is an abundance of dry powder waiting for ignition.

What is not talked about nearly as much but is likely soon after the election is the passage of a CARES ACT 2.  The only uncertainty seems to be whether it will be $1.5 or 3.0 trillion – this will largely be determined by the outcome of the election.  From the markets standpoint, either is a winner, i.e., it will re-energize optimism in the economy.  This may very well ignite the dry powder looking for a spark.  I’ve had several inquiries in the last month or so for gas station land to develop … positioning inquiries I call them – not ready yet, but getting ready to get ready!

Backing up my own grass roots survey are my friends at the University Michigan with their Consumer Sentiment and Expectations Index, below.

Feeding into economic enthusiasm is employment.  The employment base continued to expand at moderated pace last month. Security in a job is a big factor in consumer’s expectations. Employers added 661,000 personnel to payrolls in September, restoring 11.4 million of the 22.2 million positions lost in March and April. September unemployment rate:  7.9%.  Despite these gains, last month’s total of under 1 million new roles continued the recent trend of slowing growth.

Firing up the economy by either of the catalysts mentioned above could get our markets “exciting”, the CARES Act notwithstanding.

Some, not all, but some banks are active in the market, particularly with SBA loans.  (Trump wants small business to survive and thrive, and he’s passed down those marching orders.)

We’re not out of the pandemic crisis woods yet, but the natives are restless.  Given the opportunity, or excuse, and they’ll make a break for it.

​Market Comments, 9-4-20

After enduring a U.S. real (net of inflation) GDP plunge of 32.9% in the second quarter, consumer and business confidence is holding up much better that would be anticipated.  The NFIB’s Small Business Optimism index fell 1.8 points in July to a still solid 98.8. Consumer Confidence fell in August to 84.8, and is lower now than it was in April and May at the height of the lockdowns. Still confidence is not as battered as it typically might be during a recession.

                                                                       The market – any and all markets – hates uncertainty.

Still, how much uncertainty will the markets tolerate? 

Q2 CRE transaction volume was down 40% overall, and as much as 70% in some segments.  CRE loan originations were down 48% year-over-year, and 31% vs. Q1.  The lack of transaction volume translates into not much price movement.  The dry powder is waiting for the bottom to fall out of the market, and that hasn’t happened.  Forbearance, lease re-negotiations, Government money pumped into the system to maintain liquidity, etc.  And how long might these tactics last?  Hum-m-m-m!

And from where might the next threat of uncertainty come from?  A Biden announcement … a Trump announcement, a Democratic acquisition … a Republican rebuttal, another cop or black rioter shot, another city burned.  Such is the socio-political landscape.  The financial and investment markets, however, have been digesting these events for at least 6 months or so.  It’s unlikely they’ll crack between now and Nov. 3.  The surprise uncertainty may be that these activities may not stop on Nov. 4, regardless of who wins the election, or regardless of when we may get a COVID vaccine or therapeutic treatment.

A closer look at our arena.  Buyer inquiries have accelerated, again, mostly originating from CA.  Those actually submitting offers, however, are few.  My suspicion is that they’re waiting for the market to soften as reflected in public markets.  The reality is, however, that private markets for businesses bear little correlation to public market pricing.  That’s been the case going up, it will continue to be the case going down.  Private markets are much more sensitive to the price of money (interest rates), and availability.  7(a)’s that will finance the business as well as the real estate I see quoted are regularly showing 5-5.5% (Prime + 1.5-2%.  The SBA ceiling is Prime + 2.75%.)  LTVs are still 80-85%.  I recently received a term sheet for the ground-up construction of a gas station/c-store and carwash at 81% LTV … yes, a construction loan. 

On the sell side inventory is still lacking – particularly quality inventory, i.e., businesses that are actually making money, and real estate without much deferred maintenance.  And what comes to market, or would like to come to market, is priced at levels reminiscent of CA ZIP codes.  Even if these were to contract, it’s unlikely they would appraise at a level that would support the transaction. 

CRE-only properties, i.e., no business included with the real estate, have been quiet.  These would include investor-owned with a tenant, idle properties (vacant) including those for redevelopment, and land-only.

We recently (last month) started a beta test period with a listing platform called CREXi. ( This is the first apparently authentic competitor to Loopnet I’ve seen surface since Loopnet was acquired by CoStar. They offer some additional marketing tools beyond Loopnet, and internal support mechanics.  I’m still learning the program, but it looks promising.  

One of the marketing tools they offer is an auction platform for CRE.  This is not a viable tool for businesses, even if the business includes the real estate. There are several dedicated auction platforms around, and have been for years.  Historically they do well in bringing buyers to markets during periods like we’re going through at this time … previously 2002-2003

(post 9-11), and 2009-2010 after the financial crisis and recession.  One of the implications an auction has is for the buyer is that the subject property is distressed, and can be acquired at a bargain price.  The operative term here is “implication”.  The required distress of the property is clearly not a requirement, or even a condition. Compared to other auction services I’ve explored over the years, CREXi offers some favorably slanted conditions for the seller.  Give me a call if you’d like to discuss this further.

Market Comments, 8-5-20

All, literally all, I read about commercial real estate (CRE) is about how transaction volume has collapsed, prices are unknown (primarily because lease income is uncertain), and we don’t know when it will recover. I have no doubt the macro data and reporting are true, but it masks over our particular segment, and business brokerage in general.   A few observations from this month’s data:

  • Real estate only properties continue to show declines in interest on the order of 50%.  However, gas station businesses that include the real estate are firm vs. pre-COVID numbers.
  • Interest in land for sale is down as much as 70% vs. pre-COVID.​
  • Interest in redevelopment property, which in our case is generally retail except in rural markets which can have broader uses, is firm vs. pre-COVID.

Conventional CRE financing has fewer types of lenders participating in new loans, particularly money center (big-boy) banks.  SBA lenders who are financing businesses, however, are more aggressive, even for businesses that don’t include the real estate.

NOTABLE DISTINCTION:  Buyers of, and lenders to owner-occupied property have greater transparency and confidence with the historical income stream than with a tenant.  With gas stations/c-stores, essential businesses, there is greater confidence in continuance of the income than with non-essential businesses. Those Q2 financials received at this time show that most gas station/c-store businesses are doing as well as, or better than, pre-COVID. Buyers and lenders are suspicious of these and question the continuance, but it is what it is.

The NFIB Small Business Optimism Index jumped 6.2 points to 100.6 in June.  The bounce back in Small Business Optimism to the 100 level is heartening, but we fear it may be a bit premature. The survey likely came too early to reflect the sustained rise in new COVID cases in late June & July which have now elicited a new round of shutdowns.  Sales expectations surged 37 points, swinging from -24% to 13%. The proportion of business owners that expect the economy to improve rose 5 points to 39% and plans to hire doubled to 16%.  The rise in the NFIB is tempered by the declining share of firms showing earnings improvement, which fell 9 points to -35%.  Capital spending plans edged higher, climbing 2 pts to 22%. The rise may reflect needs to invest in personal protection equipment. June’s rise in Small Business Optimism appears to have gotten a temporary assist from prior business re-openings, modifications and expansions to the PPP, and the buoyant stock market.

 As mentioned in our
Blue Paper last month, we expect the economy to progress and digress in fits-n-starts for the near-to-intermediate terms. 

Opportunity Buyers Get Your Money Ready.  Money being accumulated for distressed property purchases led real estate fundraising in the first half of the year as investors looked to take advantage of falling property values due to the impact of the coronavirus and efforts to contain its spread.

Investors are moving up the risk spectrum, away from the best properties in the best markets, private equity data provider Preqin said in its quarterly update. Opportunistic funds, those set up specifically to buy properties at a discount, have amassed $22 billion, the most capital targeting any real estate strategy, accounting for 56% of the total raised so far this year.

Moreover, property sales in June began to show the first signs that investors were beginning to put some of that opportunistic capital to work, according to June sales tracked by CoStar.

Distressed property sales made up a larger percentage of total sales in June than in May for hotel and retail properties — the two property sectors hit hardest by the coronavirus. Distressed sales include auctions, deed in lieu of foreclosure transfers, foreclosures, bank-owned sales and short sales.

“In the wake of the challenges our economy has faced in recent months, we believe there will be significant opportunities,” according to a statement from Rockpoint co-founders Bill Walton and Keith Gelb.

While the above comments reflect institutional CRE investors, the smaller entrepreneur investor is of the same mindset.  The lessons and opportunities coming out of the Great Recession in 2010 are still fresh, and those who missed the boat then are preparing not to miss it again this time.  Although the dynamics of the CRE market are decidedly different this time around, the result may look very similar.

Discounting similar to the global financial crisis not anticipated. The prospects of acquiring real estate at deeply reduced prices has buyers lining up capital in preparation of a wave of distressed assets becoming available. However, investors may be disappointed by the volume of distress this cycle. For properties not financed through CMBS, most financial institutions are committed to delaying foreclosure, following a trend established during the global financial crisis. CMBS may also take longer to become available as Congress considers legislation to prevent automatic foreclosure triggers that tie the hands of the loan servicers when considering forbearance. Furthermore, prompt action by the Fed and Congress could dampen this downturn, limiting the amount of distress that comes to market as a result.

Distressed properties will be concentrated in a few sectors. As the world’s largest economy adjusts to a post-pandemic world, entire sections of investment real estate may need to be altered. Hotel and retail properties could go into receivership if travel fails to resume and a permanent shift away from dining out emerges. Additionally, less traffic in large office districts will soften demand for retailers that cater to commuters, potentially forcing those assets to shutter permanently and be foreclosed. Investors with a penchant for repositioning real estate may be able to acquire these properties for below-replacement costs. However, most distressed transactions are not expected to be based on relative price. Low interest rates will make deals attractive based on the property’s underlying operating fundamentals.

Awaiting deep discounting reduces opportunities. Investors searching for deals to trade for “pennies on the dollar” could miss out on attractive properties as the economy recovers. In situations where buyers can acquire assets at a fraction of the previous valuation, new considerations will need to be made regarding their future viability. Following the global financial crisis, investors only needed to wait for the economy to recover. After the health crisis, however, fundamental shifts in the economy and real estate are anticipated. Namely, dispersed working could reshape office districts and population density in several areas. Some assets may never recover previous valuations as demand shifts.

Numerous investors await discounted properties. The pool of capital sitting on the sidelines is at a record level with close to $5 trillion sitting in money-market funds. Due to the liquidity in the market and access to capital by a broader range of investors, the competition for bank-owned assets will be significant when the time comes for lenders to move properties off their books. Opportunity funds have raised hundreds of billions in anticipation of discounts, and that capital may need to be deployed prior to any significant price cuts as banks kick the proverbial can down the road. As capital does move off the sidelines, it may be focused on property fundamentals rather than replacement cost. Investment real estate that trades at attractive cap rates relative to pre-pandemic levels will be the benchmark for distress during this cycle rather than price discounts.

Unique distress creates opportunity. The sheer magnitude of the economic downturn will result in some assets being returned to lenders, namely properties that cannot reopen in their pre-health crisis format due to a shift in demand. Buyers willing to target these deals may find the discounting that is not expected elsewhere. Adaptive reuse strategies are already in discussion for real estate. Experience-oriented retailers have the greatest likelihood of falling into this category. The other major opportunities will be found in assets where the business and real estate are intrinsically linked, including hotels and seniors housing. A significant share of these properties are owned by business operators and opportunity funds are likely to target more passive real estate, paving the way for private buyers to compete.


The fuse is now lit on about $10 trillion in corporate debt.

Back in April when the economy was on lockdown, it became clear that many large businesses were in serious trouble – specifically restaurants, commercial real estate, and retail. At that time, multiple large chains informed their lenders that they would NOT be paying rent in April. Here’s a headline from March 26:

Cheesecake Factory, Subway, other major retailers tell landlords they can’t pay April rent due to coronavirus.

To deal with this issue, banks and large financial institutions gave their borrowers 90-day forbearances on their debt payments… meaning those groups wouldn’t be required to make debt payments for 90 days.

Put another way, the banks told these businesses: “Don’t worry about making any debt payments for 90 days… think of this as a debt holiday.”

That was in April.  The 90-days was up last month!  Will lenders offer a re-do of another 90-days?  Or maybe scale back to 30-day bites at a time?  Will the Government step in with yet another plan to keep the carnage down?  Prior behavior suggests that a “stay of execution” will be forthcoming.  Lenders and the Government don’t want a repeat of 2009-2010 … 2-3 months before the election!

But without a savior, this means these same businesses will now have to start making debt payments again. And if they have not yet truly recovered from the economic shutdown… we’re about to see a tsunami of defaults and bankruptcies, as well as layoffs and shutdowns. 

This process has already begun. Take a quick look at a few recent headlines:

  • Wells Fargo reportedly preparing to cut thousands of jobs
  • United Airlines warns it could furlough 36,000 employees by Oct. 1 as demand remains low
  • Storied apparel brand Brooks Brothers files for bankruptcy as it seeks a buyer and closes dozens of stores
  • Muji files for bankruptcy
  • GNC files for bankruptcy and will close up to 1,200 stores
  • 24 Hour Fitness files for bankruptcy, closes more than 100 gyms


All told, US corporations have over $10 trillion in debt. And corporate leverage is worse today than it was in 2008. It’s only going to get worse from here on out.

Meanwhile gas station/c-store buyer activity remains brisk.  Sellers, however, are holed-up on the sidelines.  Many believe if they come to market now, they’ll be beat up by the dynamics of the economic condition – this currently is looking like an erroneous assumption.  Buyers stepping up seem willing to pay non-distressed prices for the operating business.  Many if not most gas station/c-store businesses have held up well through the first half of the year, digesting the ups-n-downs thrown at them by COVID.

Pricing is still driven by the financial performance of the business that owns the real estate.  This is different than the landlord/tenant relationship that typically exists in other segments of investment CRE.  What buyers and lenders want to see is how the business faired through the interim COVID 2020 period vs. 2019.  If you’re business is holding up well, your valuation should hold up also.  Most gas station buyers are already in the gas station business, and know well their unique situation vs. the economy in general.

9.5% !!!

What’s that?

  • A crash in the bond market and that’s now the current yield on the 10-year Treasury?  Well … No.
  • The Q2-20 growth rate in China’s recovering economy?  No again.​
  • How about the percent of Black Lives Matter supporters who said they’d vote for Trump?  Not likely!

OK, here it is … The U.S. GDP decline in the 2nd quarter.  A record-setter to be sure. This was worse than any quarter during 2008 crisis, worse than any quarter during the stagflation of the 1970s, and worse than any quarter of the Great Depression!  And yet the stock market rallied on the news.  We’re not investment analysts, Registered Representatives (stock brokers), investment advisors, or any of the like, so comments on the disparity between market performance and the economy will be left to more qualified sources.

We do note, however, that the Fed just announced it will be providing at least $125 billion in liquidity to the markets every month from now until the end of 2021/early 2022, a total of

$2.1 trillion in the next 18 months. (Unlike economic data, the stock market REALLY cares about liquidity.) The downstream effect of this, of course, is inflation and the strength of the dollar. But that’s a discussion for another day – keep an eye out for the next Blue Paper.

And for our part, we also really care (or should care) about liquidity. The mechanisms the Fed uses in flushing funds into the economy and markets has a lot to do with where the money ends up (Wall St. or Main St.) and what use it can be in the hands of those receiving the funds. Without grinding down into the details, we’ll note a fair amount of this will be funneled to member banks to not only shore up potentially, or actually, delinquent loans, but also to make new loans!  Yes indeed – new loans. New conventional CRE loans will be on the menu for investors and developers, but a significant amount will go to the SBA for small businesses.  This segment of the economy has been Trumpeted (pun intended) as a major focus for economic recovery and maintaining & creating jobs.  Fortunately for us, participants in the small business market and largely dependent on small business financing, our good fortunes are endorsed by the administration – as long as it lasts.  At least another 168 days regardless of whether Trump gets re-elected or not. (His 4-year term officially ends Jan 20 … by act of Congress!) Of course if he is re-elected we’ll get “4 more years”.  But no politicking here!

​Market Comments, 6-6-20

Let’s start by seeing how bad the market is behaving in response to COVID-19.   (Unless otherwise specified, the market we’re talking about if the gas station-c-store market.) Data gathering from the 2 leading marketing websites, Loopnet and Biz Buy Sell (BBS), gives us the following activity.  (Loopnet is primarily a commercial real estate site, and Biz Buy Sell is for businesses.  There are others to be sure, but these 2 are dominant.)  The data is drawn from my listings only.

                                                                        Loopnet (90 day period)     BBS (26 week period)

Avg. Hits/Listings Jun ’19–Mar ’20:                       6,521                                      11,7890

Avg. Hits/Listing Apr ’20-May ’20:                         5,345                                      14,574

Percent Change Pre-COVID                              Down 18%                                Up 24%
10 Mo’s vs. Post-COVID 2 Mo’s:

Data from MJG website:                                                                             % Change vs. 2019

Avg. Hits/Listing/Mo. 2019:                                    1,032

May ’20 Hits:                                                             907                                         Down 12%

Avg. Hits/Listing/Mo.                                                896                                          Down 13%

Jan ’20-May ’20:

Many if not most of closed transactions during the Mar-May period were transactions initiated before COVID became known.  Consequently, we’re not considering closed transactions during the last 3 months as indicative of the market’s response to COVID.

Observations & Conclusions:

Clearly the CRE market is reacting much more poorly to COVID than is the business market.  If fact, the gas station business for sale market appears to be having a positive impact from COVID.

This points to the different participants in these 2 markets.  The CRE market is largely made up of investor/landlords, many of whom are not intimate with the gas station business.  The business market is composed of owner-operators, many of whom are currently in the gas station business either locally (AZ) or out-of-state.  The later group has experienced the impact of the violent decline in crude prices a few weeks ago, and the resulting effect on pooled margins.  Most don’t expect these to be sustained but it does point to the resilience of the gas station business.  They also see the impact of being designated an “essential business”.  Many of these have already started scavenging for the weak members of the industry that they anticipate being to acquire at going-out-of-business prices.

Also, the gift the SBA is offering of paying the first 6 months of payments on new loans closed before the end of Sept. is an added kicker.

The investor market has a different mindset.  Conventional CRE loans (non-SBA) that investors can acquire are unsettled in their pricing (interest rates) and other terms.  Lenders are rapidly trying to acquire data points to price loans, but the slowdown in transaction volume exacerbates this effort.  Also, the Fed & Treasuries continuous flooding of new emergency programs into the market further muddies the water, as well as tying up lender (primarily banks) resources administrating these Government programs.

Investors are also leery of pricing points.  Gas stations as investments are categorized as single tenant net lease (STNL) properties, as opposed to multi-tenant, e.g., a shopping center.  Traditionally lease rates/cap rates follow interest rate movements in the economy, and with Fed Funds at 0-1/4%, the expectation is for rents to follow.  That would imply a rise in prices, but these don’t happen in lock-step. If rents fall as is expected in a recession (which some have already pronounced) the effect is to pull prices down with them. The notable thing is that at this time, STNL rates, (cap rates) have held firm for gas stations.  Not so for other type of STNL properties, e.g., drug stores, QSRs, auto after-market stores, etc. This process is based on the tenant being able to make the monthly rent payment.  When tenants start missing rents, or negotiate for new terms, lower rent, etc., it sets the negative tone in the market. This will play out over the next several months.  We expect several STNL tenants will fail and the properties go dark.  At the same time, we expect the gas station to be the shining light on the hill.  As this is seen we expect a migration of investor dollars to leave money market funds, rolling bank CDs, and tin cans under the dog house and search out investments in gas stations.

We expect lenders to have similar observations … just not as quick.

The good part for sellers (that’s most of you reading this) is that buyers are finding few and fewer stations available.  Some sellers have pulled listings thinking that when the dust settles there will be a better market (higher prices) for their offerings.  Also, some potential sellers are back-peddling on coming to market for the same reason. And as long as they can keep pooled margins up, the overall gross profit is up even if volume is down.  The result is that the thin inventory we had pre-COVID is now even tighter.  We call this a supply:demand imbalance in favor of the seller. 

One demographic observation.  The frequency of buyer inquiries from CA has accelerated.  I’ve commented on this for months – maybe years.  During COVID the public policies dealing this have become more intolerant by the citizenry.  Their calls are expressing more urgency in “getting out”.  I suspect this will continue throughout the year.  If the current leadership is sustained through the November election, expect the floodgate to open for every conservative who might be left.

An update on the PPP.  We know many of you have participated in the Paycheck Protection Program offered out a few months ago.  This next bit of news may be of interest to you.

The President was expected to sign the “Paycheck Protection Program (PPP) Flexibility Act of 2020” (H.R. 7010) as soon as last Friday, Jun 5. Highlights include:  This may have been done, but at this time we don’t have confirmation of that.

Extends the PPP loan forgiveness period from eight weeks to 24 weeks or through the end of the year, whichever comes first.
Reduces the 75 percent threshold needed to be spent on payroll to 60 percent which allows a greater percentage of the PPP loans to be used on rent and other approved non-payroll expenses.
Increases the PPP loan repayment period from two year to five years.
Allows businesses that receive loan forgiveness to defer payroll taxes.
Extends the June 30 rehiring deadline to December 31, 2020. PPP loans will be forgiven if businesses restore staffing or salary levels that were previously reduced. The provision would apply to worker and wage reductions made from February 15 through 30 days after enactment of the CARES Act, which was signed into law on March 27.
Provides additional flexibility on loan forgiveness for PPP recipients who show they could not rehire workers or reopen due to safety standards.

Also, we note a brief observation of the economy, specifically labor.  The unemployment rate from the Labor Department for May actually fell to 13.3% from 14.7% in April, and was much lower than the 19.5% estimate from economists (“much lower” is an understatement of the error!).  We are forced to temper our enthusiasm of this figure, and are not ready to call a start to the recovery.  We expect labor statistics as well as other economic data to be volatile, this to translate into volatility in the various investment markets.  Characteristically, the CRE and private business brokerage markets are more opaque, cushioning the knee jerk response to every bit of data that comes down the pike.  Data is harder to get, less available, and takes longer to analyze before it leads to action – a decision.  I suspect there are very few day traders of private businesses or CRE.

Market Comments, 4-3-20

So much happening so fast – COVID-19 … current and downstream effects!  We’ll try to sift through the clutter and focus on those factors affecting our market over the next few month.  As I review data accumulated since our last letter, this will be a challenge.  So here we go.

The primary factor affecting the market’s current negative behavior is the coronavirus … COVID-19. So the primary battle to be won is to neutralize this threat to the economy.  Prior to the emergence of COVID-19 the economy was on fairly firm ground. Some pluses & minuses here-n-there, but largely stable.  Retaining the economy’s structural framework through the crisis is paramount to positioning for a quick resurgence to where we left off. The Government’s quick actions over the last couple weeks have been directed to that end. We’ll be able to gauge the success of these actions

Consumer’s represent about 70% of the nation’s GDP. The decline in the University of Michigan’s Survey of Consumer Sentiment for April was the largest one-month plunge on record. However, the preliminary print of 71.0 for April is still 15.7 points higher than the November 2008 low. The bottom fell out beneath the current conditions index, which shed 31.3 points, nearly doubling the prior record drop of 16.6 points set in October 2008.

To the extent that any silver linings can be found in this report, the Expectations Index only fell 9.7 points. That is a considerable decline, but not nearly as bad as the record 16.5-point drop in December of 1980. Had it not been for this faith in tomorrow and hope for what is on the other side of this crisis, the drop in confidence would have been worse. We expect a record contraction in consumer spending in Q2.

After 44 consecutive months in positive territory, the Animal Spirits Index (ASI) dropped and turned negative (-0.33) in March. The global pandemic has led to a sharp turnaround in sentiment, with four of the ASI’s five components contributing negatively to the index: the S&P index, the policy uncertainty index, the VIX or volatility index, and the Consumer Confidence Index. The only positive contributor was the spread between the yield on the 10-year and 3- month Treasuries which turned positive in March after inverting in February. Expect further deterioration in April, and possibly May.

From where will the glimmers of hope originate? Why from day-to-day improvement in the control & ultimately eradication of the coronavirus, of course. As incremental improvements are made in winning the COVID-19 war, the economy will be put back on track with incremental improvements, e.g., lifting of travel restrictions, various segments of businesses will be allowed to re-open, specific geographical areas of the country are expected to begin hiring or reinstating employment.

But the Government is fighting to retain the economic structure with the few weapons it has – money … debt money. Be it funded from fiscal or monetary sources. The current legislatively approved commitment is about $3 trillion. (This is a day-to-day moving target.) But where does it go? Will this indeed shore up the main street economy or become another Wall Street boondoggle like all the QE’s of not long ago. 

What isn’t spelled out is that somewhere in the Source-Recipient transfer is about $450 billion going to the Fed via the Treasury who is then to fund loans originated by banks. The way banking works is that this money can be leveraged 10X between the Fed and the banks. That

$450 billion, then, represents $4.5 trillion of potential loans. That makes the liquidity capacity of the CARES Act closer to $6-7 trillion than the advertised $2.3 trillion. Clearly a minor oversight in public disclosure. That additional $4 trillion net of additional liquidity could very well find its way to supporting financial markets. (More on this in our upcoming Blue Paper.)

But our job at hand is to remain informed, optimistic, and ready to resume life as we know it when circumstances permit.

Along that line … in every chaotic event there is opportunity!

Cloistered away as well are, our day-to-day emotional pulse is limited by sources that represent the mood of the nation, whether a small circle of family & friends or the national media – not a positive environment. We wonder is there really “normal” work being done out there? How much longer might this go on?  How bad can “bad” get? No answers … only speculative opinion. War is hell!

But this from the front lines:

We closed escrow on one of the stations we had listed last week!  An 18 day escrow – all cash.  A CA buyer – are we surprised?  Not really.  As we’ve said in this report now for many months CA buyers are leaving the sinking ship.  The COVID-19 has increased their motivation.

I have 1 loan that was approved prior to COVID-19 and are only pending updated documentation.  Lender has not pulled their commitment or wanted to re-underwrite the loan for the current environment.

I have 3 loans in process of submission; two SBA and one conventional.  Both loans are being aggressively received and we expect multiple offers on both.  Underwriters across the board have not raised the bar on standards, although some of the more conservative lenders are starting to make moves in that direction.  Not always as straight forward as reducing LTVs or raising states rates, but more subtlety in covenants, particularly with conventional loans.

The SBA has announced that it will pay the first 6 months of payments for 7(a) loans funded by the end of Sept. (Trump is trying very hard to protect his small business segment … responsible I’m told for about 40% of the workforce.)

Buyer inquiries remain firm, although the tone of conversations reflects caution.

Sellers, however, are in a quandary – that’s most of you reading this. (Lender’s aren’t yet, but soon will be.) The question is how will my business and/or real estate be valued for the negative effects of COVID-19?  If it’s valued primarily on an income approach basis, what will that get me when my financials have to reflect Mar, Apr, etc., going out for how far? A concern not overlooked at MJG.

I’ve discussed this topic with 3 of the good gas station appraisers I know in the AZ market. They’re all working with various adjustments to data to reflect the anticipated situation, but nothing concrete … with one exception.

One of the appraisers is the AZ rep for a national company specializing in gas stations & truck stops. His company has developed a model reflecting just what we’re talking about.  It was originally developed and released internally several weeks ago. They’ve been collecting data & updating weekly. The appraiser has offered to collaborate with me in their continuing development of their model.  The more data collected, the more refined the model, and the more accurate the results – it’s a process.  I suspect I’ll be able to apply their data and methodologies to current listings for pricing re-valuation, as well as new listings to be brought to market.  (This area is also a big concern to folks who might want to bring their stations to market.)  This also has direct application to the lending business – appraisers primary market. For underwriting, the primary basis their loan offers is the ability to service the loan from the underlying business, or property in the case of a rental.

INTRODUCTION - The following comments are offered to keep you abreast of the market for gas station and c-store sales in Arizona. AtMJG, we identify 3 geographic markets statewide: the Phoenix metro area (an MSA), Tucson, and the rest of the state which we identify as "rural".  By type of market, we follow and will discuss both the business and real estate markets, in as much as many if not most small business owners of gas stations and c-stores own both the business and the real estate that the business occupies.  Our Market Comments updates will be more frequent and less strategically detailed (dealing with shorter timeframes) than reports found in the News and Reports section of this website.  As your read down the Market Pulse, you'll be reading the most recent comments first, progressing to older publishings, which if read in order, will allow you to develop an historical reference to the market.  We will generally keep up to 12-24 months of Comments online, but will archive older comments.  You can request archieved comments by contacting us directly with your request. 

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