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Quick Service Restaurants Drawing in Investors

CHICAGO—The QSR sector differs from other net lease retail sub-sectors as almost three-quarters of the properties are leased to franchisees rather than corporate entities.

By Brian J. Rogal | brianjrogal | | Updated on August 02, 2016

 

chi-Tacobell While overall median cap rates decreased, the supply of QSR properties increased by about 26% year over year.
CHICAGO—Cap rates in much of the single tenant net lease sector hit historic lows during the economic recovery, but recently those declines have moderated. The net lease quick service restaurant sector, however, saw its median cap rates sink to 5.7% in the second quarter of 2016, a compression of 10 bps from the prior year, according to a new report from the Boulder Group , a Northbrook, IL-based net lease firm. Boulder found big differences between QSR properties leased to franchisees and corporate-leased properties. The cap rate for the former declined by 10 bps to 5.8% while cap rates for the latter experienced a 20 bps decline to 5.45%. While cap rates decreased, the supply of QSR properties increased by about 26% year over year. McDonald’s restaurants, especially the corporate properties, have been in some ways the sector’s gold standard. Last year, for example, the cap rates for these restaurants hit just 3.95%. This year, however, the rates actually increased to 4.1%, a bump of 15 bps. But the median rate for Chick-Fil-A fell 25 bps in the past year, and now stands at 4.0%. “Investors are attracted to Chick-Fil-A as their store sales are well ahead of any of its peers,” Randy Blankstein , president of Boulder, tells GlobeSt.com. “Chick-Fil-A, according to QSR Magazine , averaged approximately $3.1 million in sales per restaurant in 2014. This is more than $500,000 more than Panera Bread and McDonald’s average store sales in 2014 and more than triple the average KFC location.” The QSR sector differs from other net lease retail sub-sectors as almost three-quarters of the properties are leased to franchisees rather than corporate entities, he adds. And corporately guaranteed QSR leases now have a 35 bps premium over franchises, due to the perceived lower risks. 1031 and private investors continue to dominate the acquisitions of net lease assets priced below $10 million. In the second quarter of 2016, the median asking price for single tenant QSR properties was $1.83 million. “The single tenant net lease QSR sector will remain active as supply remains abundant for assets with long term leases,” according to the report. “The attractive sale leaseback environment for QSR operators will continue to add supply to the market. Lower price points, rental escalations and typical NNN lease structures of this asset type continue to attract private and 1031 exchange investors.”

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