Private Investors Dominate Net Lease Casual Dining Market

Cap rates in the net lease casual dining restaurant sector increased 25 basis points to 6.00% in the first quarter of 2017 when compared to the first quarter of 2016. Casual dining restaurant properties with corporately guaranteed leases had cap rates of 5.75%, while franchisee leased properties were priced 50 basis points higher at 6.25%. Cap rates for casual dining restaurant properties leased to franchisees will vary depending on the strength of the operator. In the first quarter of 2017, franchisee backed casual dining restaurants accounted for 49% of the overall supply of casual dining restaurants.

A contributing factor to the increased cap rates associated with the net lease casual dining sector is the increase in concentration of franchise backed leases. In the first quarter of 2016, franchise backed leases accounted for only 31% of the casual dining sector compared to 49% in the first quarter of 2017. Accordingly, the cap rate premium associated with the casual dining sector when compared to the overall net lease market declined to 19 basis points from 43 in the prior year.

Despite isolated issues with some casual dining tenants, this asset class remains a popular target amongst net lease investors as it is one of the few net lease retail sectors that is e-commerce resistant. Furthermore, casual dining properties frequently exhibit absolute triple net leases and rental escalations during their lease term. Similar to the overall net lease market, private and 1031 buyers remain the most aggressive purchasers of net lease casual dining assets due to their absolute price points. Outside of portfolio sales, private buyers accounted for 70% of net lease casual dining transactions in the first quarter of 2017.

The single tenant net lease casual dining restaurant sector will remain active as this asset type continues to attract all investor types. Private and 1031 buyer will continue to be the primary buyer of non-portfolio transactions as they do not have the same yield requirements of institutional investors. Corporately guaranteed leases or franchisees with significant operational experience will remain in the highest demand among private investors due to the strength of credit associated with the assets. REITs and institutional investors will continue to seek larger portfolios of casual dining restaurant properties via sale leaseback transactions. Portfolio transactions typically allow economies of scale and higher yields compared to acquisitions on a one-off basis.

Randy Blankstein is President of net lease advisory firm The Boulder Group. http://bouldergroup.com/