Cap Rates for Single Tenant Casual Dining Properties Lag Net Lease Market – The Boulder Group

The Boulder Group announced the release of its Net Lease Casual Dining Report today. In the first quarter national asking cap rates in the single tenant casual dining sector increased to 6.73%, according to the 2021 Net Lease Casual Dining Report. This represented a 14 basis point increase when compared to the prior year.

The economic impact from Covid-19 within the restaurant industry caused cap rates for casual dining properties to increase. In the first quarter of 2021, single tenant casual dining properties were priced at an 82 basis point discount to the overall net lease retail market. Cap rates in the casual dining sector increased by 14 basis points year over year while the overall net lease retail contracted by 24 basis points.

“Throughout the pandemic, net lease investors targeted tenants with strong balance sheets” says Randy Blankstein, President, The Boulder Group. “This was especially true for the casual dining sector which experienced a tremendous amount of turmoil, particularly in mid-2020.”

Casual dining properties with corporately guaranteed leases generated cap rates of 6.15%, while franchisee leased properties had cap rates of 7.12%. Cap rates for corporate guaranteed leases experienced 10 basis points of compression while franchisee lease properties increased by 12 basis points.

“Throughout 2020 and the first quarter of 2021, Covid-19 impacted the restaurant sector in many ways” adds Jimmy Goodman, Partner, The Boulder Group. “Traditional casual dining restaurants experienced the majority of the negative headwinds.”

Investors noted a variety of these obstacles and focused their attention on the strongest operators within the sector, including Brinker, Darden and Texas Roadhouse. Corporate casual dining brands were better positioned to utilize their robust balance sheets during the pandemic and quickly pivoted business to curbside, carryout, and online ordering.

“In the first quarter of 2021, corporately leased properties were priced at a 97 basis point premium to their franchisee backed counterparts” John Feeney, Senior Vice President, The Boulder Group adds.  “This represented a 22 basis point increase from the prior year.”

Investors will be carefully monitoring the sector to see how restaurant brands recover and prove the viability of their business models in a post-pandemic world. Investors will look for the most current prototypes or the ability to convert their properties to more modern designs that can facilitate drive thru and/or separate entrance for curbside or delivery services. “As the country continues to recover from the pandemic, the expectation is that pent-up demand for in-person dining will continue to help the restaurant industry recover” says Blankstein. The expectation is that the majority of the focus in the sector will be on leases to the strongest operators with long term leases. However, with a limited supply of high quality assets across the overall net lease market, some investors will venture out on the risk spectrum for casual dining properties that exhibit strong residual real estate (low rents, large land parcel, etc.).

To view the full report: https://bouldergroup.com/media/pdf/Net-Lease-Casual-Dining-Research-Report.pdf

About The Boulder Group

The Boulder Group is a boutique investment real estate service firm specializing in single tenant net lease properties. The firm provides a full range of brokerage, advisory, and financing services nationwide to a substantial and diversified client base, which includes high net worth individuals, developers, REITs, partnerships and institutional investment funds. Founded in 1997, the firm has arranged the acquisition and disposition of over $6 billion of single tenant net lease real estate transactions. From 2012-2020, the firm was ranked in the top 10 companies in the nation for single tenant retail transactions by both Real Capital Analytics and CoStar. The Boulder Group is headquartered in suburban Chicago.