Restaurant Sector More Bullish Than Others

A brand-new Taco Bell just sold for a 5.5% cap rate in Fleming Island, Florida! If you know where cap rates have been trading across product types in the net-leased sector, this may not appear to be too surprising. Cap rates have compressed in the net-leased sector as far as 120 basis points from where they were at the last market peak, but this go around, the restaurant sector has compressed even further than other net-leased product types. That means that values today are some of the highest we have ever seen, especially in the restaurant sector.

As a frame of reference, 2007 saw one of the hottest historical markets ever; values peaked and buyers were bullish. In that market, brand new 15-year to 20-year Taco Bell leases were trading at 7% cap rates. These long-term Taco Bell deals were typically backed by 50+ unit operators. The Taco Bell in Fleming Island that just sold was a new 20-year lease backed by a 19-unit guarantee and traded for at a 5.5% cap rate. That is a 150-basis point spread from the last market cycle and it’s not an exception.

dunkin representative photo

Just last month, we sold a brand-new Dunkin Donuts with a shorter-term lease and a smaller guarantee at a 5% cap rate. The deal was a brand-new 10-year Dunkin Donuts lease backed by a 13-unit guarantee in St. Petersburg, Florida. Within only a few weeks of bringing it to market at a 5% cap rate, we had sourced multiple offers. The competition created ultimately resulted in a 36-day closing at full list price. Only 12 months ago, 10-year Dunkin Donuts deals were trading at an average cap rate of 6%. For further perspective, in 2006, the average cap rate for a comparable Dunkin Donuts was 7%.

We are seeing restaurant properties trade 25-50 basis points lower on a cap rate basis than most other net-leased sectors right now.

Restaurants are hot!

Even when faced with the potential risk of shifting consumer trends and the sales slumps of the casual dining sector, buyers understand that restaurants serving the general population are not going anywhere. Similar to how multi-tenant shopping centers are attracting more service based tenants to compete with online sales competition, restaurant brands are evolving to cater to these changing consumer trends and when the dust settles, people will still need to eat.

Because of the aggressive restaurant cap rates versus other sectors, owners in the restaurant sector have been weighing their options and crafting a strategy for how to take advantage of these recent trends. For our clients, the biggest concern is where to put the money and ensure a successful exchange. The initial thought is that you are trading into the same market and so the opportunity is perceived to be a wash, however, we have had success in moving our clients from the restaurant sector to other net-leased sectors where cap rates, although compressed, are not as bullish.

Often times, there are opportunities across other sectors such as drug stores and auto-related investments that can not only replace or improve our client’s current cash flow position, but also improve their real estate investment in general; better guarantee, longer lease term, or upgrading their core real estate to larger parcels or hard corners.

Values remain the highest they have ever been, while cap rates remain more compressed than in the last market peak. Both buyers and sellers should remain bullish in the current market as prices in this market are still extremely aggressive compared to the historical 10-year average and the net-leased opportunities on the market offer a long-term passive cash flow stream often with a hedge against inflation via regular rental increases, especially across other sectors.

Whether or not you plan on transacting in 2017, I am always available as a specialized restaurant net-leased expert and resource for market information. It is my mission to ensure you have the tools necessary to proactively plan your long-term investment strategy. For more detailed research specific to your property or market, give me a call directly to discuss how I can help.

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