According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report, cap rates in the single tenant net lease sector rose slightly. Had a lender in place in 30 minutes looking to do the deal. More than $8.4 billion in investment sales were reported over the last three months, jumping 20 percent from the previous quarter and 72 percent from this time last year. The lessee must arrange title insurance for its leasehold. patrick.nutt@srsre.com. They obtained fantastic, low, fixed rate insurance money for us. The industry has shown resilience by successful technology improvements that benefit both bank businesses and clients. Thats precisely what happens in a subordinated ground lease. In a ground lease (GL), a tenant develops a piece of land during the lease period. They handled all of the complex lease negotiations and contractual paperwork. Fast turn around. The following data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. Note that the model currently only allows for an interest-only loan. Retail trade sales recorded an increase of 26.9% YOY while motor vehicle and parts were up 71.1%. Commercial real estate property valuations are driven by a number of factors, but two of the most important are the tenant lease type and the prevailing cap rate(s) in a given market. This is due to the risk that the tenant will vacate the space or that they will renew their lease at a lower rental rate. QSR remains a steady and highly sought-after asset type given the sectors minimal need for adaption compared to other food service providers. We expect to see a large influx of dark or subleased CVS assets hit the market throughout the year ahead. The biggest driver of the lease term is the financing that the lessee arranges. In this article, well explore. Tenant pays base rent plus their share of property taxes, insurance, and maintenance. We expect to see more of the same in quarters moving forward as developers and investors seek sites suitable for and/or equipped with new drive-thru prototypes for these brands. Give them a call if the deal makes sense they can get it funded. The data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. Revenue for C-Stores is expected to grow at an annual rate of 1.5% until 2026. We'd love to get in touch with you about how we can assist you with your retail real estate needs. A net lease is a type of commercial real estate lease that requires the tenant to pay a base rental amount plus their share of the propertys operating costs. Casual dining restaurants have pivoted to a new business model normalcy. We referred them to all our business associates. While there has been a growing demand on homeschool companies, more net lease investors are seeking newly developed education space to perform higher yields as on-campus restrictions fluctuate. In the first quarter of 2021, bank properties with leases in excess of 18 years commanded cap rates of 4.30%, a 10 basis point decrease from the prior year. Will Cap Rates Continue to Increase in 2022? Despite a 5-basis point increase in the last quarter, cap rates arent expected to move substantially, although its possible the sectors average could rise above the 6.0-percent mark by year-end. However this might discourage lenders, who wouldnt be able to take possession in case of default. Normally, the lessee takes a lease on some raw or prepared land and constructs a building on it. Data is provided for 12 regions and 45 metro market areas encompassing the entire continental U.S. Just $159 per office (not per user) per year. Given the essential nature of the grocery sector that provides a safe and stable recession resistant asset, investors continue to look at this sector as stable cash flow. to a ground lease needs to be refinanced with only 20 years remaining on the ground lease, the expected valuation decline can make this exceptionally difficult. The sector is largely dominated by Walgreens transactions. All Rights Reserved. Cap Rate: 5.25% Circle K Sector: Convenience Store 4.78% Understanding Credit Ratings Strong activity throughout the sector shouldnt come as a surprise though. Investor Survey. But buyer demand is strong across virtually all industrial subtypes. The bad news is that the pandemic is grinding into its third year with a new, highly transmissible variant that has prompted cities like New York to reinstitute restrictions. Source: Stan Johnson Co. Research, Real Capital Analytics. The big box sector within net lease continues to see diminished activity due to the pressure of online consumer spending, evolving smaller square footage footprints and business restructure. I highly recommend them to anyone needing commercial financing. Managing Principal, National Net Lease Group & Investment Properties Group, 949.698.1116 Click the button below for a printer friendly subscription form which we must have to create or renew your subscription. By subscribing or purchasing surveys, you agree to our Terms of Use in their entirety including copyright provisions and the restrictions that accompany an ordinary annual subscription which represents a single site license, the use of which is limited to employees of a single office. If they are the sole occupant, their share is 100%. Ronny was very friendly and though we were unable to make something happen at the moment he gave me some direction to go. A flight to quality locations resulted in about half as many Q1 transactions compared to Q4. Casual dining net lease is one of the most impacted retail sectors affected by COVID-19 compliances as businesses struggle to stay afloat. The topic of financeability is complex and your legal experts will need to wade through the various intricacies. As the pressures from the Omicron variant persists, more consumers are purchasing goods rather than services. We sought out the services of Ronny, CFO of Assets America. The 10-Year Treasury continues to climb as the Fed announced they expect to increase interest rates at least four times in 2022 as yields increase due to the pressure of growing inflation. Conversely, anything that lowers the risk profile drives cap rates lower, which means that the market value of the property rises. In Q1, cap rates held steady in the 7% range (6bps compression from Q4) as the average term, rent, and Price/SF remain relatively flat. Expect this sector to continue to outperform other sectors as flight to safety and recession resistance remains to be a target for investors. Importantly, the tenant is responsible for paying all property taxes during the lease period. Lessors might want to restrict the type of entity that can hold a leasehold mortgage. Over the past twelve months, gasoline prices have increased by 49.6%. This is difficult in an unsubordinated ground lease because the lessor has first priority in the case of default. A low cap rate means higher value and a high cap rate means lower value. It was a rather unusual ground lease, in that it was a 10-year triple-net ground lease with four 5-year options to extend. Safer assets with high quality tenants like Walgreens, Dollar General, Amazon, Whole Foods, or McDonalds on long term leases are the gold standard for safety in a turbulent market so they may be less exposed to cap rate movement. They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. It also provides real estate investors with an indication of risk high cap rates mean more risk, which is why investors need a higher return. Welcome to CBRE's H2 2021 Cap Rate Survey (CRS), which reflects the views of hundreds of professionals about how sentiment and pricing are changing across multiple dimensions of the commercial real estate market. For this report, SRS reviewed Q1 2021 sales reported by Costar for the following sectors: Automotive, Bank, Big Box/Superstore, Casual Dining, C-Store/Gas, Dollar Stores, Educational (Childcare), Fast Casual, Grocery, General Retail, Medical STNL, Pharmacy, and QSR. In the first quarter national asking cap rates in the single tenant bank ground lease sector increased to 5.47%, according to the Q12020 Net Lease Bank Report This represented a 17 basis. Expect this sector to continue to outperform other sectors as flight to safety and economic resistance remains to be a target for investors. National Net Lease Group: Q2/2022 Retail Report, National Net Lease Group: Q4 2021 Retail Report, National Net Lease Group: Q4 2021 Medical/Office Building Report, More Drive Thrus (2-3 Lanes) and Smaller Dining Rooms, Contactless Payment/License Plate Recognition, New Contactless Services/Smoothie Making Machines & Salad Robots, Ecommerce Grocery Landscape Transformation. Low cap rates mean less risk, which is why investors are satisfied with a lower return. Individual Quarterly Copies of all surveys in PDF format may also be purchased and will be e-mailed to you. Ultimately, we received exactly the space we needed along with a lower than market per square foot pricing, lease length and end of term options we requested. Although single-tenant industrial activity remains far from record-setting levels, the sector continues to outperform within the net lease market and accounted for 47 percent of second quarter 2021s sales volume. Copyright 2023. Consumer views on both present and future economic expectations continue to downgrade from the pressures caused by inflation and the lack of available goods caused by global supply chain issues. As we enter 2022, the net lease market is working to digest a substantial amount of news, both good and bad. In this day and age, its especially rare and wonderful to work with a person who actually does what he says he will do. In actuality, investor demand for industrial product remains quite strong. On one hand, interest rates are rising. In Q2 2021, properties leased to Chick-Fil-A and McDonald's had cap. Here are some components that go into structuring a ground lease: The lease must be sufficiently long to allow the lessee to amortize the cost of the improvements it makes. This additional aid to funds is expected to boost economic growth and push up both inflation and interest rates. The advantages of a ground lease include: The disadvantages of a ground lease include: This is a great commercial lease calculator. Further, QSRs typically offer a lower price point and a higher percentage of absolute NNN lease types for investors compared to other sectors. This will allow you to earn income and possibly capital gains. As restrictions continue to be lifted, activity in casual dining will start to resume to a new business model normalcy. We chose the property we liked best, and Ronny went to work. The increase purchases in goods will likely compound inflation as demand remains high and supply chain challenges continue. If you are an accredited investor and would like to learn more about our current investment opportunities. 10-Year Treasury Note | expected to rise to near 2% in 2021, up from the current rate of 1.1%* This increase could create challenges for buyers to obtain ideal financing. FNRP. As pharmacy stores are being looked at as another shopping alternative for consumers and pharmacists roles have changed given their accessibility to the public as health care professions, it is expected cap rates will remain relatively flat or slightly compressed through 2021. This sector is expected to see secure activity into 2022, as brands make continued efforts to combat recent supply chain issues. Cap rates for Q1 recorded at 6.45% while the average lease term dropped to 8 years from 10 years in Q4. In Q4 its especially important to understand the impact the ongoing pandemic and overall market conditions have had on the relationship between length of lease term and capitalization rates across all product types as well as the effect on buyer bias toward certain sectors. That control reverts to the owner/lessor upon the expiration of the lease. General retail sectors include fitness, hardware, furniture, home goods, cellular stores and other retail types which do not fall under one of the other focused sectors. At the time of financing, it was extremely difficult to obtain bank financing for commercial real estate. This increase exemplifies that consumer confidence is on the road to recovery as shutdown restrictions have been drastically lifted with the economy continuing to rebound as business re-open. As the formula above suggests, there is a direct relationship between a propertys cap rate and its value. Now that weve discussed the relationship between cap rates and property values, lets talk about where they may be headed in 2022. Once the lease expires, the tenant turns over the property improvements to the owner, unless there is an exception. In this way, the lender can more easily sell the leasehold in case of default. They were our One-Stop-Shop. There is evidence that cap rates have expanded further since then. As early 2021 closings were pushed ahead into the previous quarter, first quarter sales activity appears to have lost momentum with a 50 percent drop to $6.2 billion in sales. However, this may conflict with the standard wording of a ground lease, which gives some control to the lessor. 103 0 obj <>/Filter/FlateDecode/ID[<353FF36C33814C419710E32BF719654E>]/Index[57 100]/Info 56 0 R/Length 190/Prev 315778/Root 58 0 R/Size 157/Type/XRef/W[1 3 1]>>stream Consumers have shifted toward personal mobility over public and shared transportation due to the impacts of COVID-19. I don't think 39 is a magic number. With more than $27.5 billion in sales already reported, even a lower than average fourth quarter could make 2021s annual volume the sectors new high-water mark. Alternatively, an unsubordinated ground lease maintains the landlords top priority claims if the leaseholder defaults on his payments. hb```g``g`c` B@16) pM``]0hv=$BjI|4,]#1 40#qUQ$6(+@Z"L$Hc/ "UX.gHo & 17?`z7L/*? P` O%XVL F.1C hbYrP >|[l CVS assets have seen an increase in trades as investors seek out to both purchase and sell quality sites in the wake of the brand announcing they will be closing 900 stores, starting in the Spring 2022. Banks continue to be in high demand for investors given the strong credit of the tenants. A propertys capitalization rate cap rate for short is a performance metric that describes the ratio between its net operating income (NOI) and value. who want exposure to commercial real estate assets, but not the hassle of managing them on a day to day basis. Factors that can cause a net leased propertys cap rate to change include things like: market, location, tenant quality, and lease length. Assets America guided us every step of the way in finding and leasing our large industrial building with attached offices. Tenants with less financial strength push cap rates higher because they present more credit risk. Due to the attractiveness of assets with these attributes, many of them are being traded before coming to market, closing with cap rates in the low- to mid-5% range. While Q1 saw the number of big box trades increase to 6, from 2 in Q4, diminished activity is expected to continue through 2021 as owners are tasked with trying to resolve big box space use options. 0 That means that the lessee pays the property taxes during the lease term. The demand on the educational sector has been changing and evolving due to the impact of COVID-19. Attached offices normally, the lender can more easily sell the leasehold in case of.! 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