National asking cap rates hit a historic low of 5.26 percent in Q2, representing a 39 basis points decrease in Q2 when compared to the prior year. Cap rates for corporate leased QSR properties declined by 20 basis points to 5 percent while QSR properties leased to franchisees declined by 43 basis points to 5.40 percent.
The primary contributing factor to the decline in cap rates is related to the increased investor demand for net lease properties with a drive-thru component.
Demand for net lease QSR properties outpaced the overall net lease sector in the past 12 months. The premium associated with net lease QSR properties was 76 basis points in Q2 2021 compared the prior year (60 basis points).
Following the loosening of in-person dining restrictions related to Covid-19, properties with drive-thru still continue to command significant investor demand. This trend is expected to increase as tenants seek locations with drive-thru capabilities to facilitate pick up and third-party delivery.
Brands including Chipotle and Shake Shack have added drive-thru lanes to their newest concepts and other QSR veterans like Taco Bell have announced prototypes with up to four drive-thru lanes.
The majority of the QSR sector is leased to franchisees. However, those properties with a corporate backing command a 40-basis point premium over franchisee backed assets.
There is a further premium associated with the upper echelon of credit backed tenants in the QSR sector. Investors now view QSR brands Chick-Fil-A and McDonald’s as best in-class.
Accordingly, these two tenants represent the lowest cap rates in the sector and even the overall net lease sector. In Q2 2021, properties leased to Chick-Fil-A and McDonald’s had cap rates of 3.70 percent and 3.85 percent, respectively.
The median asking price of all QSR is $2,469,000. Burger King leads the way with $2,544,000, followed by Chick Fil A (Ground Lease) $3,500,000; Dunkin’ $1,753,000; KFC $1,959,000; McDonald’s (Ground Lease) $2,571,000; Panera Bread $3,450,000; Pizza Hut $1,144,000; and Starbucks $2,500,000.
The single tenant QSR sector will continue to garner demand as investors seek net lease investments with drive-thru capabilities in the lower end of the price spectrum ($1 – $3 million). A bifurcation between corporate/large franchisees and smaller franchisees will continue as investors seek the security that larger guarantors offer.
One-off transactions will continue to be dominated by private and 1031 exchange buyers. Institutional investors will remain primarily interested in sale leaseback portfolios in order to achieve economies of scale.