Quick-Service Restaurant Cap Rates Dip

Cap rates in the net-lease quick-service restaurant sector fell to 5.90 percent in the second quarter for properties leased to franchisees as prices continued to increase, reported the Boulder Group, Northbrook, Ill. 

“This represented a 35 basis point decline from the prior year,” said Boulder Group Vice President John Feeney. 

Quick-service restaurants such as McDonald’s, Panera Bread, Starbucks and Taco Bell differ from other net-lease retail sectors because franchisees rather than corporate entities lease most of the properties. Cap rates for corporate-owned net-lease quick-service restaurant (as opposed to franchisee-owned assets) fell 10 basis points to 5.65 percent, the Boulder Group’s Net-Lease QSR Market Report said. McDonald’s ground leases continue to represent the lowest cap rates for all quick-service restaurant properties at 3.95 percent due to their superior credit rating, long-term leases, low price points, rental escalations and strong brand recognition, the report said. 

Feeney said many 1031 like-kind exchange investors with low equity requirements prefer to purchase quick-service restaurants due to their relatively low median asking price of $2 million. “Additionally, quick-service restaurant properties typically feature recognizable tenants with long lease terms, no landlord responsibilities and rental escalations,” he said. For example, the median remaining quick-service restaurant lease term equals 16 years, Feeney said.

“As a result, the premium for net lease quick-service restaurant assets was 60 basis points over the entire retail net-lease market,” he said. Sale-leaseback transactions by quick-service restaurant operators increased supply in the sector, especially the supply of long-term leased properties, the report said. “In the current record-high pricing environment, franchisees are able to unlock the value of their owned real estate and are able to use the capital for expansion, remodeling of existing locations or the paydown of existing debt.” 

“The single-tenant net-lease quick-service restaurant sector will remain active as the lower price points, rental escalations and typical [triple-net] lease structures of this asset type continue to attract private and 1031 exchange investors,” Feeney said.