Net Lease Investors Navigate the Coffee Wars

In the highly competitive world of net lease investments, coffee chains have become a major battleground. With the rise of online shopping and changing consumer preferences, net lease investors have been looking to coffee chains as a safe bet for steady returns. As a result, major players in the coffee industry have been expanding rapidly, with Starbucks and Dutch Bros leading the charge. This growth has led to intense competition among these chains and an ongoing “coffee war” in the net lease sector. 

Starbucks is often considered the top coffee chain from a net lease investment perspective due to its strong brand recognition and consistent financial performance, translating to stable, long-term revenue streams for investors. With a BBB+ credit rating, lenders can easily finance the deals, making them more accessible to a wider variety of buyers. 

Starbucks typically signs 10-year leases with rent increases in the base term, which can provide investors with a reliable and predictable income stream. However, their leases include landlord responsibilities of roof and structure, occasionally extending the responsibilities to parking lot and landscaping. 

In 2022, Starbucks announced they would plan to open 2,000 new locations by 2025, which has led to a surplus of inventory on the market for the tenant. There are over 130 Starbucks on the market with an average asking cap rate of 4.99%. Excluding California, the average cap rate for Starbucks on the market is 5.07%. Twelve Starbucks traded in Q1 2023, compared with roughly 25 closings in Q1 2022.

Dutch Bros is a drive-thru coffee chain that has experienced rapid expansion over the last 24 months. In 2022 they opened 133 new U.S. stores, increasing their footprint by 25%. The company went public in 2021 and has become known for its high-quality coffee, customer service, and unique company culture. The company has also shown resilience during economic downturns, with sales continuing to grow despite the pandemic-related challenges in 2020. 

Dutch Bros continues its strong growth trajectory with a plan to add an additional 150 stores in 2023. The average unit volume systemwide for Dutch Bros is $1,924,000, which is up 4% compared to 2021. There are currently 70 Dutch Bro’s assets on market, with an average cap rate of 4.58%. 

Dutch Bros typically signs 15-year leases with rent escalations, providing investors with a reliable income stream and hedges against inflation. Since the locations are drive-thru only, they are often situated in high-traffic areas, enabling the brand to secure new sites in dense retail corridors where other tenants are not able to develop given their larger site requirements. Overall, Dutch Bros assets are an attractive net lease investment opportunity for investors seeking growth potential and stable income streams.

The coffee wars in the net lease sector have expanded beyond the traditional big players, with emerging chains like 7 Brew Coffee, Black Rifle Coffee, and Scooter’s Coffee gaining popularity among consumers and investors alike. These up-and-coming chains offer unique value propositions, such as 7 Brew’s distinct menu offerings catered toward the younger generation, Black Rifle Coffee’s veteran-owned and operated business model, and Scooter’s specialty coffee drinks. Both 7 Brew and Scooter’s focus on a franchisee model while Black Rifle focuses on corporate locations, with a strong presence on direct-to-consumer bulk coffee sales. 

As these chains grow and gain market share, they present attractive net lease investment opportunities for investors looking to diversify their portfolios and capitalize on developing trends in the coffee industry. 

It will be interesting to see how emerging chains and established players adapt to changing consumer preferences and market conditions. While each chain has its own strengths and investment potential, they each share a unique appeal for net lease investors seeking reliable income streams from different brands. As the competition in the net lease coffee wars intensifies, investors will need to carefully consider the strengths and potential risks associated with each chain before making investment decisions. Regardless of which chain emerges victorious, net lease investors are likely to continue to find opportunities for growth and stability in this popular and highly competitive segment of the commercial real estate market.

Sabrina Kortlandt is First Vice President of SRS Real Estate Partners – National Net Lease Group