Restaurant Market Update | Cap Rate Trends

Restaurant Market Update | Cap Rate Trends

Net leased restaurants had a home-run year in 2016!

2016 historical cap rate graph

Although net-leased inventory increased over the past twelve months, more buyers entered the market and the inventory could not keep pace with the demand, which had a positive impact on both cap rates and values. The fact is that property values are higher today than they were at the last market peak and it is not entirely due to higher rents. The average cap rate in 2016 is over 130 bps lower than the historical 10-year average. As interest rates begin to creep upwards moving into 2017, it is expected that cap rates will rise as a result. However, although cap rates across the board are expected to rise between 25 bps and 50 bps over the next 12 months, demand for net-leased restaurants is expected to remain, which should yield another busy year in 2017.

Check out the trailing 12 stats below for some of the strongest QSR brands in the marketplace today.

2016 QSR data

McDonald’s and Chick-Fil-A maintained the lowest cap rates in the marketplace, while Starbucks held the highest price per foot on a sale, which is closely tied to the high rents they are willing to pay for their locations. Quick Service Restaurants as a net-leased investment continue to be in high demand for investors primarily due to their passive nature and small price point. High performing QSR brands like McDonald’s and Chick-Fil-A are aggressively traded because in addition to the strength of their guarantees, they maintain a business model that affords a fairly low rent per square foot. This allows an investor to replace the cash flow stream if the property were ever to become vacant.

Although full service restaurants operate under a variety of business models with various preferred demographics, the average cap rate for some of the biggest and best performing brands landed around the same range (See graph below for details). Carrabba’s (Bloomin’ Brands) and Red Lobster (Darden) held the highest price points in 2016 sales, while IHOP maintained some of the highest paid rents across the sector. The larger footprint of these buildings yields a higher rent, which is why the price point on full service restaurant net-leased deals is typically double the price point on QSR properties. Over the past year, most of these transactions were all cash deals because despite the low interest rate market, financing often times created negative leverage.

2016 sit down data

Demand remains strong in the restaurant net-leased sector and although the average rent per square foot has crept upward over the past 12 months, new long-term leases being signed are being closely critiqued by tenants to ensure they do not spread themselves too thin in the event of another downturn. 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.

Whether or not you plan on transacting in 2017, I am always available 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.

The Market is Warming | 2014

We’re already moving through 2014!

Not only did it fly by, but activity in Commercial Retail space around the Tampa MSA has caught fire. When we sold a CVS in November for a 5% cap rate, which was a National record low cap rate for drug stores, we thought things were pretty hot. In January, however, our deal inventory for both shopping centers and net-leased assets started ramping up. It sounds like we are not the only ones seeing the market pick up either.

NREI released an article about sales data in January of 2014, which shows that sales volumes are up and cap rates are reaching new lows in the Retail sector. The article shows year-over-year sales volume for the retail sector to be up 27 percent!

Bill Rose, Vice President and National Director for our National Retail Group with Marcus & Millichap, explains in the article that as a firm, our inventory is up over last year and we are projected to have an improved 2014. Locally in our Tampa office, that is certainly true. In 2013, we doubled the transactions we closed in 2012. Entering 2014, I alone activated 5 new listings in January, which is clearly a strong indication of a good start to the year for both multi-tenant retail and net-leased investments.

Not only are the real estate markets picking up in the Retail sector, but it appears businesses are starting to bounce back as well. Hessam Nadji’s investment sales blog reported in March of 2014 that retail sales have lifted for the first time in three months, which is likely due to consumer spending starting to pick up. He anticipates that as the job market continues to grow, retail sales should gain even more traction. That’s great news for our local Tampa market and surrounding sub-markets as the Tampa-St. Petersburg-Clearwater metropolitan area has the third highest number of jobs in February 2014 among all the Florida Metros. That’s not even mentioning the projected jobs that will be created in the near future from the many developments looking to enter the Tampa MSA.

Hessam continues to point out that there are many economic indicators that support retail sales to continue growing forward. Although the mandatory health insurance and rising interest rates are looming concerns in the near future, these are small speed bumps compared to what the retail sector has endured in the past few years.

The fact is, things are looking up from all angles at this point. Businesses are doing better, consumers are spending more, investors are buying up deals aggressively with the cheap financing that is available and owners are finding it possible to sell their properties for more aggressive cap rates than we have seen since the last boom. We expect the second quarter to fly by even faster than the first. We have just as many buyers to accommodate, except now we have a little more deal flow to accommodate them with, so we don’t have time to slow down.

If you’re looking for a deal, you’re not alone. The shortage in deal inventory combined with the cheap money recently made available by lenders is causing a unique environment where large pools of investors are competing for a small pool of deals. Investors have been willing to take down deals at compressed cap rates because they are still able to make their desired return from the spread on financing.

The good news for investors is that more deal inventory is trickling in.

More and more owners are realizing that it’s not just a great environment to buy in, but also a great time to sell. Many of our clients and owners are moving off the fence and bringing their properties to market with confidence.

Let’s be honest, these record low interest rates will not be around forever. At some point within the next few years those rates will go up, investor returns will squeeze from the spread, and that will cause cap rates to go up and property values to go down respectively. Unfortunately, until our economy bounces back strong enough to support raises in the rental markets, values are very much reliant on available financing. If you’ve been on the fence about buying or selling, now is the time to seriously consider your options.

I welcome the opportunity to provide more detailed and localized information relevant to you and your retail investment goals.

If you have any questions, or if I can provide you with additional information locally or in other markets across the country, please feel free to contact me at (813) 387-4796.