The current low cap rate environment has given encouragement to operators that want to monetize their real estate and use the proceeds for repayment of debt or stock buyback programs, Boulder says. “The expectation is that the sale leaseback market will remain active as operators will attempt to take advantage of the low cap rate environment.”

CHICAGO—Casual dining restaurants have become one of the more popular options for investors in the net lease sector. Cap rates for these investments were 5.75% in the first quarter of 2016, according to the first report on casual dining properties by The Boulder Group, a net lease brokerage firm in Northbrook, IL, a Chicago suburb. Among casual restaurants the firm found a 43 bps cap rate premium over the entire net lease retail sector, a good illustration of this Investor demand.

“Casual dining is gaining favor as net lease investors are seeking e-commerce resistant retailers,” Randy Blankstein, president of Boulder, tells GlobeSt.com. “The casual dining sector has been an area where investors can find longer term leased assets despite the lack of construction over the past few years. The sale leaseback plans from tenants including Olive Garden, Bob Evans, Outback Steakhouse and Red Lobster, has added supply of long term leased assets to the market.”

And just like quick-service restaurants, the corporate leases are considerably more popular with investors than those leased by franchise operators. The corporate leases had a median cap rate of 5.65% while franchisee leased properties were priced 65 bps higher at 6.30%, Boulder found. But in the first quarter of 2016, franchisee backed casual dining restaurants accounted for only 31% of the overall supply of casual dining restaurants. In addition, cap rates for franchisee backed restaurants can fluctuate depending on the financial strength and size of the franchisee.

Many buyers, especially private and 1031 exchange buyers, want casual restaurants because most have absolute triple net leases that also feature rental escalations during the primary lease term. In addition, these properties typically feature recognizable tenants like Olive Garden in highly visible locations. In the first quarter of 2016, private buyers accounted for 93% of all single tenant casual dining restaurant transactions outside of portfolio sales. During the same time period, REITs and institutional investors accounted for 75% of all portfolio transactions involving casual dining restaurants.

The current low cap rate environment has given encouragement to operators that want to monetize their real estate and use the proceeds for repayment of debt or stock buyback programs, Boulder says. “The expectation is that the sale leaseback market will remain active as operators will attempt to take advantage of the low cap rate environment.”