Net Lease Casual Dining Properties Fall Out of Favor Among Investors

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The Boulder Group cites softening casual dining sector and certain brands as main contributors.

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"The casual dining sector is currently priced at a discount to the overall net lease retail market due to some weaknesses within the casual dining space"

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 6.59%, according to the 2020 Net Lease Casual Dining Report. This represented a 27 basis point increase when compared to the prior year. Casual dining properties with corporately guaranteed leases generated cap rates of 6.25%, while franchisee leased properties had cap rates of 7.00%. Both corporate and franchisee guaranteed leases experienced increases of 10 and 15 basis points respectively over the past year. Cap rates for casual dining properties leased to franchisees can vary depending on the strength of the guarantor.

“The sector is heavily bifurcated amongst casual dining brands,” says Randy Blankstein, President, The Boulder Group. “National brands with sustainable business models are still generating interest amongst investors who are active within the sector.”

The primary factor contributing to the increase in cap rates was the softening of the casual dining segment. This is especially true for certain tenants including Applebee’s which experienced a 25 basis point increase in cap rates in the first quarter of 2020.

“The casual dining sector is currently priced at a discount to the overall net lease retail market due to some weaknesses within the casual dining space,” adds Jimmy Goodman, Partner, The Boulder Group. “Casual dining properties were priced at a 44 basis point discount to the overall net lease retail market.”

Cap rates in the casual dining sector increased by 27 basis points year over year while the overall net lease retail contracted by 12 basis points. Most attribute the rise in cap rates for casual dining properties to specific brands, including Ruby Tuesday, Red Robin and Golden Corral, that have failed to keep up with changing consumer preferences.

Casual dining tenants were greatly impacted by Covid-19 during the late stages of the first quarter. As many casual dining tenants were forced to shift focus to carryout and delivery, they saw sales volumes drop significantly as dine-in services were suspended. Accordingly, net lease transactions in the casual dining sector have, for the most part, been put on hold.

“Casual dining tenants will need to prove to net lease investors a sales trajectory of pre-covid levels in order for transaction velocity to begin again,” John Feeney, Senior Vice President, The Boulder Group adds.

Investors will be seeking casual dining brands that have ongoing business models that can take advantage of the increased success of curbside services offered during the current Covid-19 period.

Investors are carefully monitoring how restaurants perform during their re-opening stages with limited seating capacity prior to making acquisitions. Investors will pay closer attention to in-place rents, sales performance, residual real estate and the strength of the lease guarantor and restaurant brand. “Corporately guaranteed leases or large franchisees with strong financials will remain in the highest demand among private investors due to investors flight to quality response in this sector,” according to Blankstein.

To view the full report:

About The Boulder Group

The Boulder Group is a boutique, Chicago-based investment real estate services firm specializing in transaction and advisory services for single tenant net lease properties. Founded in 1997, the firm has closed over $6 billion of net lease property transactions. The firm provides a full range of brokerage, research, advisory, and financing services nationwide. The level of annual, single-tenant transaction volume consistently ranks the firm in the top 10 companies nationally, according to industry benchmarks determined by CoStar and Real Capital Analytics.

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