In the first quarter, national asking cap rates in the single-tenant casual dining sector increased to 6.59%, according to The Boulder Group's 2020 Net Lease Casual Dining Report. That was a 27-basis point increase compared to Q1 2020.

Cap rates didn't increase evenly across casual dining. Those properties with guaranteed leases generated cap rates of 6.25%, while franchisee leased properties had cap rates of 7.00%.

Both corporate and franchisee guaranteed leases experienced increases of 10 and 15 basis points respectively over the past year. Cap rates for casual dining properties leased to franchisees can vary depending on the strength of the guarantor, according to The Boulder Group.

The COVID-19 shutdown, which forced restaurants to close their dining rooms, clearly drove the softening in casual dining. Sales volume dropped as casual dining tenants were forced to shift focus to carry out and delivery. 

"In March, it [business] was already tailing off," says Randy Blankstein, president of The Boulder Group. "With casual dining, most of the bread-and-butter businesses are eat-in restaurants. Some of them had better business models regarding take-out and delivery."

As cap rates in the dining sector increased 27 basis points year over year, the entire net lease sector declined 12 basis points. Casual dining properties were priced at a 44-basis point discount to the overall net lease retail market. 

"COVID, with casual dining and a lot of other sectors, has accelerated the problems that the weaker players had to a large extent," Blankstein says.

Despite the cap rate movement that occurred in Q1, Blankstein sees more volatility ahead.

"I don't think you've seen all the turmoil play out, meaning this report data is at the end of March," he says. "Clearly, in April and May and into June, there will be so few transactions that occur."

Investors are carefully monitoring how restaurants perform during their re-opening stages with limited seating capacity before making acquisitions. "Casual dining tenants will need to prove sustainability of concept for transaction velocity to begin again," The Boulder Group said in the report. "Additionally, investors will be seeking casual dining brands that have ongoing business models that can take advantage of the increased success of curbside services offered during the current Covid-19 period."

The key metrics investors will look at as they decide whether to move back into the market include in-place rents, sales performance, residual real estate and the strength of the lease guarantor and restaurant brand. They will seek casual dining brands that have ongoing business models that can take advantage of the increased success of curbside services offered during the current Covid-19 period.

"Corporately guaranteed leases or large franchisees with strong financials will remain in the highest demand among private investors due to investors' flight to quality response in this sector," according to Blankstein.