C-Store Cap Rate Outlook Uncertain As Sector Waits for Interest Rate Cuts

Convenience stores are seeing steady investment volume and state compared to peer asset classes, according to a new report from Avison Young.

“While a slight uptick in average cap rates was observed toward the close of 2023, this pales in comparison to other product types such as office buildings,” they wrote. “An interesting observation is the deviance between C-Store cap rates and U.S. 10-Year Treasury yields, which have historically had a direct relationship.”

The future of cap rates is uncertain, as the report notes. On one hand, the Federal Reserve, which signaling an expectation of rate cuts this year is also warning that it won’t back down from reducing inflation. But Wall Street expects the cuts to happen, which would likely mean that cap rates would steady and then drop with the lower costs of investment.

C-stores in general saw 5.61% cap rates in 2023, compared to 4.76% n 2021. There were some big differences in cap rates by region: Northeast (5.52%), Mid Atlantic (5.59%), Southeast (5.65%), Midwest (6.62%), Southwest (5.39%), and West (5.19%).

The C-store average cap rate was 5.61%. The single-tenant net lease average was 5.95%. There were big differences in some tenant figures: 7-Eleven (5.07%); SQRL (7.15%); Wawa (4.93%); and Circle K (5.15%).

“C-Store resiliency is due to the smaller price point of the transactions, the critical nature of use, and the push into the QSR sector,” they said. “Cap rates and deal pricing will continue to vary depending on the specific asset and local market, making it critical to understand the underlying dynamics of even the smaller C-Store deals.”

There are currently 152,396 convenience stores in the U.S. Of those, 54% are single store operators and 80% have fuel sales.

Current developments among more successful stores are the addition of electric vehicle charging stations, footprints with a quick serve restaurant sense to them, with made-to-order food and both indoor and outdoor seating for people waiting to charge their cars.

“While other verticals have seen significant increases in cap rates, C-Stores have bucked the trend with little change,” they wrote. “This is largely driven by the excellent credit of many of the many operators as well as the overall view of C-Stores being an in-demand segment asset class for the foreseeable future.”