Asking Cap Rates On the Rise in Single-Tenant Casual Dining

In the first quarter, national asking cap rates in the single-tenant casual dining sector increased 14 basis year-over-year (YOY) to 6.73%, according to the 2021 Net Lease Casual Dining Report from The Boulder Group.

The Boulder Group pins the blame for the rising cap rates squarely on COVID-19. In Q1, casual dining cap rates were priced at an 82-basis point discount to the overall net lease retail market. Cap rates in the overall net sector contracted by 24 basis points, while cap rates in the casual dining sector increased by 14 basis points YOY.

Not all casual dining properties are the same, however. John Feeney, senior vice president of The Boulder Group, says investors focused on solid operators, including Brinker, Darden and Texas Roadhouse. Corporate casual dining brands could utilize their robust balance sheets during the pandemic and quickly pivoted business to curbside, carryout, and online ordering.

“Those are some of the stronger brands out there right now,” Feeney says. “They are the larger, more robust tenants with ironclad balance sheets.”

Those with corporately guaranteed leases generated cap rates of 6.15%, while franchisee leased assets had cap rates of 7.12%. The Boulder Group says properties with corporate guaranteed leases experienced 10 basis points of compression. By comparison, franchisee lease properties increased by 12 basis points.

“There are operators with strong balance sheets that are still having traction with investors,” Feeney says. “There are some that either have to be priced appropriately, or they’re just not going to have the same investor interest at this point.”

The Boulder Group says investors will be carefully monitoring the sector to see how restaurant brands recover. They will be looking for the most current prototypes or converting their properties to more modern designs that can facilitate drive-thru or separate entrances for curbside or delivery services.

While investors will focus on leases to the most vital operators with long-term leases, there are only so many of those properties. That will push investors to venture further out on the risk spectrum for casual dining properties that have strong residual real estate, such as low rents or large land parcels.

“If you are going down the risk spectrum and you’re buying a Ruby Tuesday that has strong real estate, and the rent is at a reasonable level, people are looking at those deals as long as they’re priced appropriately,” Feeney says. “You’re almost looking at it as a net lease play with value-add potential later on.”