THE NET LEASE QSR MARKET REPORT AUGUST 2014 QSR (CORPORATE) PROPERTIES MEDIAN ASKING CAP RATES
Tenant All Corporate QSR
Q2 2014 (Current) 5.75%
McDonald’s (Ground Lease)
4.00%
Panera Bread
5.25%
Starbucks
5.50%
QSR (FRANCHISEE) PROPERTIES MEDIAN ASKING CAP RATES
Tenant All Franchisee QSR
Q2 2014 (Current) 6.25%
Burger King
6.50%
KFC
6.00%
Pizza Hut
6.25%
Taco Bell
5.75%
Wendy’s
5.75%
QSR PROPERTIES MEDIAN ASKING PRICE
Tenant All QSR
Median Price $1,704,762
Burger King
$1,991,304
KFC
$1,755,000
McDonald’s (Ground Lease)
$1,875,000
Panera Bread
$2,804,400
Pizza Hut
$849,589
Starbucks
$1,506,750
Taco Bell
$2,160,000
Wendy’s
$2,270,044
MARKET OVERVIEW Cap rates in the net lease quick service restaurant (QSR) sector reached 6.00% in the second quarter of 2014. The QSR sector differs from the majority of other net lease retail sectors as 56% of the properties are leased to franchisees rather than corporate entities. Cap rates for QSR properties with corporately guaranteed leases have cap rates of 5.75% while franchisee leases are 50 basis points higher. McDonald’s ground leases continually represent the lowest cap rates for corporately guaranteed leases (4.00%) due to their superior credit rating (S&P: A), long term leases, low price points, reoccurring rental escalations and long operating histories at sites. Cap rates for QSR properties leased to franchisees can be affected by the guarantor who can range from a one unit operator to a franchisee with hundreds of locations. Investor demand for single tenant QSR properties can best be illustrated by the median spread between asking and closed cap rates. In the second quarter of 2014, the spread between asking and closed cap rates was only 15 basis points, while the same spread is 34 basis points for the entire net lease sector. Additionally, cap rates for QSR properties were a 50 basis point premium over the entire net lease retail sector (6.50%). A surplus of 1031 exchange investors with low equity requirements are attracted to the QSR sector as these properties have a median asking price of $1,700,000. Additionally, QSR properties feature recognizable tenants with long lease terms, no landlord responsibilities, rental escalations and are typically located as outparcels to shopping centers in high profile locations. Sale leaseback transactions by QSR operators have been able to boost supply of single tenant properties for sale. In the current low cap rate environment, franchisees are able to unlock the value of their owned real estate and are able to use the capital for expansion or remodeling of existing locations. The single tenant net lease QSR sector will remain active as the lower price points and rental escalations affiliated with this asset type continue to attract private and 1031 exchange investors. Private and 1031 exchange investors typically pay a premium for net lease properties due to their timing constraints and alternative investment options. Corporately guaranteed leases 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 QSR properties via sale leaseback transactions rather than one off transactions to obtain economies of scale.
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