The Latticework Letter — Issue #003

Last issue we told you the hike scare had cooled. It took the Fed five days to warm it back up.

The June FOMC minutes, released Wednesday, showed a unanimous hold — and "a few" officials who argued for raising rates instead. The committee described inflation pressures as broadening beyond energy and tariffs into transportation, airfares, and services, and it stripped the easing-bias language out of its forward guidance entirely. Recall the June dot plot: nine officials projecting at least one hike by year-end, eight projecting none, one lonely cut. Then, the same day, oil surged roughly 5% as the U.S.–Iran ceasefire came apart, and the 10-Year Treasury climbed to about 4.57% — its highest level since mid-May, up roughly 10 basis points on the week. Futures still put hold odds for the July 28–29 meeting somewhere between three-in-four and nine-in-ten, depending on the venue — but nobody, anywhere, is pricing a cut. June CPI arrives Tuesday; the last print was 4.2%.

Two more data points frame the week. Trepp's headline CMBS delinquency rate fell again in June, to 7.35% — but include loans that are past maturity and still current, and the effective rate is 9.53%, a multi-year high. Retail delinquencies rose 30 basis points to 6.91%. And Epiq reported commercial Chapter 11 filings up 28% year-over-year in the first half. The maturity wall grinds on, and tenant stress is broadening beneath it. Which brings us to the report we told you to watch for.

The Boulder Group's Q2 survey landed this week: net lease asking cap rates rose 2 basis points to 6.82%, reversing Q1's decline — which had been the first in fifteen consecutive quarters. One quarter of relief, then back to the grind. The details are where the money is, and they're below.

Fast food is where net lease runs its cleanest controlled experiment. The same brands, the same buildings, often the same intersections — the only variable is who signs the lease. Boulder's Q2 numbers put corporate-guaranteed QSR at a 5.85% average asking cap and franchisee-guaranteed QSR at 6.85%. One hundred basis points, almost to the penny, is what the market charges for swapping a billion-dollar balance sheet for an operating LLC.

At the top of the stack, McDonald's and Chick-fil-A ground leases are now tied at 4.45% — the two lowest cap rates in all of net lease, cheaper than Wawa, cheaper than anything with a roof you're responsible for. At the other end, franchisee paper is quietly repricing: franchisee QSR rose 5 basis points on the quarter, with Wendy's franchisee deals up 12 to 5.85% and KFC up 10 to 6.60%.

Now read that 100-basis-point spread against this fortnight's tape. On July 1, Rogue Fare LLC — a five-unit Mountain Mike's Pizza franchisee in Oregon — filed Chapter 11 with under $50,000 in assets against as much as $10 million in debt, most of it owed to two banks and the SBA. The same day, Sailormen — once Popeyes' largest franchisee — lost the right to use its lenders' cash collateral for its ~52 unsold restaurants, and won approval to reject leases on 18 more, which will close. Denny's, taken private by TriArtisan in January, has now closed more than 150 locations. Papa John's has flagged 200-plus closures for 2026; Jack in the Box is working through 50–100 of its own. And Subway's owner Roark is reportedly shopping the chain, with bankers targeting a deal by end of summer.

None of this is a QSR demand story — Americans have not stopped buying chicken. It is a leverage story. The marginal franchisee borrowed at 2021 rates against 2021 margins, and the guarantee behind your lease is exactly as strong as that math. Is 100 basis points enough compensation? For a well-capitalized multi-unit operator on a strong corner, probably more than enough. For a five-unit operator whose top creditors are the SBA and a bank you've never heard of — the Rogue Fare filing is your answer. The spread is an average. Averages are where the truth goes to hide.

On July 2, Bloomberg reported that O'Reilly Automotive submitted an all-cash bid of roughly $10 billion for Genuine Parts Company's automotive business — the NAPA network, with more than $15 billion in annual sales. A deal could reportedly be announced by end of summer, though GPC may yet keep the unit or spin it off. AutoZone's stock fell about 6% on the news, on straightforward logic: a combined O'Reilly-NAPA would be the largest player in the aftermarket, and scale in parts distribution is a weapon.

Auto parts is roughly 6.75% cap-rate territory after drifting 10 basis points wider this quarter — notably, the market now prices parts stores above auto service (6.10%, and tightening), a quiet verdict that it prefers bays and lifts to shelves and inventory. Amazon can ship you brake pads; it cannot install them.

If you own a NAPA box: an O'Reilly acquisition would likely be a credit upgrade for the stores that survive. The catch is in that word. Analysts count roughly 600 markets where an O'Reilly sits within a mile of a NAPA with no competitor nearby — those are consolidation candidates, whether through antitrust divestiture or plain redundancy. If you own AutoZone or O'Reilly paper, the credit is fine; the question is what a bulked-up industry leader does to the marginal store's renewal probability a decade out. Same lesson as the pharmacies, the dollar stores, and the pizza chains before them: when tenants consolidate, the real estate gets re-underwritten one address at a time — and the topline brand name tells you nothing about whether your address makes the cut.

That is how many net lease properties were listed for sale in the second quarter, per the Boulder Group — up 12.5% from 5,151 in Q1. Retail listings alone jumped 16.2%.

Supply surging while cap rates rise 2 basis points sounds like a market rolling over. Look closer at two details. First, investment-grade tenants with long-term leases make up less than 10% of that retail supply — the flood is in short-lease, lesser-credit product, while the assets everyone wants remain scarce. Sellers are bringing the market what they want to sell, not what buyers want to buy. Second, the bid-ask spread narrowed: the gap between asking and closed cap rates fell to 22 basis points in retail and industrial. Owners are pricing to where the market actually clears — some taking bonus-depreciation profits, some front-running the refinancing wall, some (per Boulder's own outlook) corporates monetizing real estate before borrowing costs rise further.

A market where supply expands, quality stays scarce, and sellers meet the bid is not a market rolling over. It is a market repricing in the open — which, for anyone holding cash or a 1031 clock, is the most honest kind there is.

Seneca kept a discipline he called praemeditatio malorum — the premeditation of adversity. "The unexpected blows of fortune fall heaviest and most painfully," he wrote to Lucilius, which is why the wise man rehearses loss while things are calm, picturing the fire, the shipwreck, the empty house, so that when they arrive they arrive as something already met. Rehearse the disaster and you strip it of its power to surprise you. It sounds morbid. It is actually underwriting.

Consider two data points from this week that should not coexist. On July 8, Broadstone announced a $303 million build-to-suit for a Fortune 20 investment-grade company — a 15-year absolute-net lease with 3% annual bumps, yielding 8.5% in year one and about 11.6% straight-line. The same week, Boulder's survey showed Chick-fil-A ground leases — a franchise chicken restaurant — trading at 4.45%. One of the strongest balance sheets on Earth pays more than double the yield of a chicken sandwich.

Head-on, that makes no sense; credit is supposed to be what cap rates price. Seneca resolves it. The market has already premeditated the evil — it priced each asset on the day the tenant leaves, not the day it pays. Rehearse the Broadstone vacancy and you are holding a 112,000-square-foot special-purpose technology shell in Colorado, awaiting a use nobody has named. Rehearse the Chick-fil-A going dark and you are holding a hard corner with a queue of tenants who would take the keys by Friday. The market is not pricing the lease being paid. It is pricing the one that doesn't exist yet — signed by a tenant you haven't met, on the day your current one walks.

That is why "credit" and "cap rate" keep diverging in every sector we cover: the franchisees this fortnight, the pharmacies and dollar stores and 7-Elevens before them. A cap rate is mostly the price of the empty building, discounted by the odds you ever see it empty. The owners who sleep well are the ones who, like Seneca, rehearsed the vacancy in advance — and then bought only at a price that paid them to be right.

Underwrite the vacancy. The tenant is just the discount.

The Latticework Letter is published weekly on Friday mornings. It is independent analysis — we have no brokerage relationships, no listings to push, and no financial products to sell. Our only interest is giving you a clearer picture of the market.

Forward this to someone who owns NNN assets and is tired of getting their intelligence from people with something to sell.