CHICAGO—Investors have been pouring money into the single-tenant net lease market, pushing down cap rates to historic lows, and quick service restaurants have also benefitted from the extraordinary demand, according to a new study by the Boulder Group, a commercial real estate firm in suburban Chicago.
“It's just a real active part of the market,” Randy Blankstein, president of Boulder, tells GlobeSt.com. “Everyone is looking for triple net lease products,” and buying up restaurants adds needed diversity to portfolios stocked with auto parts stores and dollar stores, among other popular sectors. As an example of the extraordinary demand for restaurants, he points to Golden Gate Capital's acquisition of Red Lobster® from Darden Restaurants and the simultaneous closing on about 500 locations by American Realty Capital Properties, Inc. in a $1.5 billion sale-leaseback transaction.
Cap rates for the fast-food sector reached 6.0% in the second quarter, according to Boulder's researchers. But there is one key difference between this sector and others in the net lease market. “Most of the other sectors are almost completely corporate-owned,” Blankstein says, but of these quick service restaurants, 56% are leased to franchisees.
And this factor has a big impact on cap rates. Corporate leases have cap rates of 5.75% while franchisee leases are 50 bps higher. The full backing of a major corporation like McDonald's provides any investor with a great deal of confidence, says Blankstein. In fact, the franchises that typically attract the most interest are those run by large-scale operators. ”Clearly, fewer people want the credit risk of being associated with a smaller owner.”
Institutional investors in particular are reluctant to spend much time on a $1.7 million restaurant, the median price for a fast food net lease deal. However, those low price points, along with the regular rental escalations associated with the sector, long lease terms, and the typically high-profile locations, does attract many 1031 investors.
At 4.0%, McDonald's ground leases have the lowest cap rates among corporate leases, “due to their superior credit rating, long term leases, low price points, reoccurring rental escalations and long operating histories at sites,” according to the study.
“Investor demand for single tenant QSR properties can best be illustrated by the median spread between asking and closed cap rates,” the researchers add. “In the second quarter of 2014, the spread between asking and closed cap rates was only 15 bps, while the same spread is 34 bps for the entire net lease sector.”
This was the first study done by Boulder specifically focused on the QSR sector. Blankstein says Boulder will respond to its growing importance by producing updates every other quarter, and he expects “demand should accelerate as the year goes on.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
