The Latticework Letter — Issue #005

Last issue we told you the hike scare had "lost most of its teeth — for now." The teeth grew back in ten days, and it wasn't the Fed that regrew them. It was oil.

The U.S.–Iran confrontation escalated through the week, attacks on tankers spread to the Red Sea, and Thursday morning Brent crude briefly topped $100 a barrel — its first visit above the century mark since late May, on pace for one of its largest monthly gains in a decade. Bond math did the rest. The 10-Year, which closed at 4.55% last Friday, climbed all week and touched 4.71% Thursday — its highest level since January 2025, a nineteen-month high. Hike odds for next week's July 28–29 meeting, which had collapsed to roughly one-in-six after the cool June CPI, roughly doubled — by Wednesday afternoon the futures market had them near one-in-three.

Meanwhile the labor market refused to cooperate with the doves: initial jobless claims fell to 187,000 — the lowest weekly print since September 1969. Not a typo. Fifty-seven years. Whatever is ailing the franchisee QSR operators in our Tenant Watch, it is not a shortage of employed customers.

Put the pieces together and next week's FOMC is genuinely uncomfortable. A hold at 3.50–3.75% remains the base case — the Fed does not react to two weeks of crude, and it is now in blackout — but the entire CPI relief rally from July 14 has been unwound by a blockade. Vice Chair Jefferson's last pre-blackout speech, at Stanford on July 16, said it plainly: hold for now, but hike if inflation stops moving toward target. Energy is the fastest way inflation stops moving toward target.

For net lease, be direct about the arithmetic: the average net-lease trade closed at a 6.81% cap rate last quarter, per Northmarq. With the 10-Year at 4.70%, that spread is down near 210 basis points — against the 257 basis points CBRE measured in the first quarter, when the 10-Year averaged 4.2%. Something gives — either yields retreat with the geopolitics, or the slow upward drift in cap rates we've tracked all year gets a push. And yes, the whale kept feeding while everyone watched the oil tape: Hut 8 signed a second 15-year, $9.8 billion triple-net lease at its Texas data campus on Monday, fully leasing a campus now worth $19.6 billion in contracted rent to a single unnamed investment-grade tenant.

In Boulder's Q2 survey, the auto sector carries the lowest average asking cap rate of any net-lease retail category: 6.45%, unchanged, while nearly everything around it drifted wider. The market has decided auto is bulletproof — needs-based, Amazon-resistant, countercyclical. This week produced the perfect controlled experiment on whether "auto" means anything at all.

Exhibit A: Getty Realty, the net-lease REIT that lives in this vertical, reported Q2 on Wednesday. It invested $128.3 million across 42 properties at a 7.4% initial cash yield — fourteen drive-thru QSRs, fourteen auto-service centers, six car washes — plus another $13.5 million after quarter-end at 8.2%. AFFO grew 5%. Guidance was raised. The committed pipeline exceeds $95 million. This is what the healthy half of "auto" looks like: oil changes, collision repair, tires — services a car owner cannot defer forever and cannot download.

Exhibit B arrived three days earlier. America's Car-Mart — the publicly traded "buy here, pay here" used-car dealer with dealerships across the mid-South — filed a 10-K containing a going-concern warning. The numbers underneath: a $139.1 million net loss on revenue down 7.9%, $722.4 million of debt, no revolving credit facility, operating on short-term covenant waivers. Over twelve months it closed 60 of its 154 dealerships — a 40% footprint reduction — leaving dark auto lots scattered across Alabama, Arkansas, Kentucky, Oklahoma, Tennessee, and Texas. The company itself names bankruptcy as a possible outcome if financing doesn't materialize.

On paper these are the same sector — both file under "auto." In practice they are two different businesses. An auto-service shop sells oil changes, brakes, and tires: things people have to buy, recession or not, to keep the car they already own running. Car-Mart's real product isn't cars — it's loans. It lends money to subprime borrowers so they can buy its cars, which makes it a finance company, and a finance company lives or dies on its cost of funding and how many customers stop paying. None of that is visible from the parking lot. And when the lending side breaks, the landlord finds out what the property always was: a paved lot with a small building on it, in a small town, built for a business that just left.

The market prices "auto" at 6.45% as a category. The market inside the category runs from Getty buying service centers at 8%-plus yields to Car-Mart landlords rereading their guarantees. The label tells you nothing. The business model on the other side of the rent check tells you everything. Underwrite the model, not the aisle it's filed in.

No major chain filed this week. What the tape printed instead was subtler, and in the long run may matter more: tenants swapping the signature on the lease while the sign on the building stays the same.

Verizon is selling 274 corporate-owned stores to franchisees, part of a broader retreat that affects roughly 3,000 workers. Nothing closes; the logo stays lit. But somewhere in that process, leases that today look through to an investment-grade telecom balance sheet start looking through to operator LLCs. 7-Eleven is running the same play at scale — 390 corporate-to-franchise conversions this fiscal year, a stated 2,600 by 2030, alongside its 645 planned store exits. If you read our last two issues, you know why this pattern deserves respect: the distressed franchisee class of 2026 is largely operators who bought in at peak, with leverage. Corporate-to-franchise conversion programs are how the next vintage gets minted. The 2026 conversion cohort is signing its acquisition debt right now, at these rates. File the dates.

Red Lobster, meanwhile, offered a reminder that recovery and shrinkage coexist. CEO Damola Adamolekun — the young turnaround chief who has become arguably the most popular executive in casual dining, with a bigger public following than most of the brands he competes with — has sales up 10% year-over-year since the bankruptcy exit, though still short of pre-bankruptcy levels. And even with the industry's most celebrated operator at the wheel, the company is still rejecting leases at 23 more locations by August 31, including a Santa Maria, California unit open since 1994. A turnaround saves the brand. It does not save every box the old brand rented — no matter how good the CEO's press is. Pressed Juicery quietly closed stores across at least four states the same week, exiting whole metros. Small tenants, same physics.

One move in the other direction rounds out the picture: Cracker Barrel closed a sale-leaseback of 26 stores for roughly $77 million and pointed the proceeds at debt reduction. That is a tenant using real estate the way a disciplined one does — as a balance-sheet tool while the business still commands institutional pricing. Twenty-six more Cracker Barrels now sit in a net-lease portfolio somewhere; the buyers, note, did that deal with the 10-Year above 4.5%. The market clears at every level of the credit stack — your job is only to know which level you're holding.

That is retail asking-rent growth for the second quarter, year over year, per CoStar's July 17 release — the slowest pace in more than a decade.

Hold that against the number we gave you last issue: a retail construction pipeline at 0.3% of existing inventory, vacancy at 6.0%, the tightest supply picture in modern memory. Scarcity like that is supposed to buy pricing power. So why is rent growth decelerating to decade lows?

Because scarcity sets a floor, not an escalator. The post-2021 surge in retail rents was a one-time repricing as the market absorbed fifteen years of underbuilding; that repricing is now largely done, and what remains is growth throttled by what tenants can actually pay — see this week's 187,000 jobless claims on one hand and June retail sales growing just 0.2% on the other. CoStar's own construction data completes the loop: the rents required to justify ground-up development still sit well above market rents nearly everywhere, which is why almost half the national pipeline is concentrated in just fifteen metros — Dallas, Houston, and Austin alone are a fifth of it. Rents are too soft to build, and supply stays at 0.3%. The machine holds itself in equilibrium.

For a net-lease owner, this number lands somewhere specific: your lease's fixed bumps. For twenty years the standard 1.5–2% annual escalation quietly lagged market rent growth, which meant your rent sank below market over time — and a below-market lease is hidden equity, the cushion that makes renewals easy and vacancies survivable. At 1.6% market growth, your escalations no longer lag anything. The cushion stops accruing. Scarcity will still protect the occupancy of a good corner. It will no longer automatically fatten the spread between your contract rent and the market's. The building has to be right on its own.

The ecologist Garrett Hardin had a rule he called the First Law of Ecology: "You can never do merely one thing." Every intervention in a complex system ripples outward through channels the intervener never considered, and the ripples do not care what you intended.

Trace this week's chain. A blockade decision in the Persian Gulf → attacks on tankers in the Red Sea → Brent through $100 → inflation expectations up → the 10-Year to a nineteen-month high → July hike odds doubling — and, at the end of the whip, the asking price of a drive-thru in Ohio. Not one actor in the first four links has ever thought about net lease. Your cap rate is the last car on a train whose locomotive is driven by people who do not know you exist.

There are two ways to respond to living at the end of Hardin's chain. The first is to forecast it — to have a view on Hormuz, and therefore crude, and therefore breakevens, and therefore the 10-Year, and therefore cap rates. Notice what this actually requires: to predict your exit cap rate, you must predict geopolitics. Nobody prices geopolitics well. The people paid most to do it were pricing a 16% chance of a hike on Monday and double that by Wednesday.

The second response reported earnings this week. Essential Properties, Netstreit, and Getty — three mid-sized net-lease REITs with no view on the Strait of Hormuz — quietly disclosed that during the quarter of the whipsaw they deployed roughly $760 million combined at 7.4–7.8% cash yields, sold what didn't fit at prices tighter than they paid, and all three raised full-year guidance. Their method contains no forecast. Buy at a spread wide enough to be wrong about the macro; ladder the debt so no single year's rates matter; hold tenants whose coverage survives a recession. They are not predicting the chain. They have priced themselves to be indifferent to it.

That is the discipline the week teaches. You cannot know what the system will do — Hardin's law guarantees the ripples reach you, and this week they crossed two oceans to do it. What you control is whether your entry price, your leverage, and your tenant's coverage require the ripples to be kind.

You can never do merely one thing. So own the things that don't need everything to go right.

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.

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