In the second quarter, national asking cap rates in the single-tenant Quick Service Restaurant (QSR) sector increased to 5.65%, which represented a 30-basis point increase when compared to the prior year, according to The Boulder Group’s Net Lease (QSR) Report.
Cap rates for corporate-leased QSR properties were unchanged at 5.20%. Cap rates for QSR properties leased to franchisees increased by 15 basis points to a 5.83%.
“OSR always does well because of the drive-through component,” says Randy Blankstein, president of The Boulder Group.
While the sector has been a relatively strong performer during COVID, Blankstein attributes the 30-basis point increase in QSR cap rates to the significant supply of franchisee-leased properties in the market
“People are looking to prune their portfolio and sell things that have shorter-term leases, [tenants with] lesser credit and secondary brands,” Blankstein says. “Likewise, investors are focused on long-term leases to tenants with better credit.”
COVID-19 made 1031 exchange and private net lease investors more conservative and focused on tenant credit and lease term, according to The Boulder Group. In the second quarter, properties leased to corporate entities were priced at a 63-basis point premium over franchisee-related properties.
“The expectation is that the gap between corporate and franchisee QSR cap rates will continue to widen throughout the remainder of 2020,” says John Feeney, senior vice president, The Boulder Group.
Blankstein says cap rates went down for Chick-fil-A and McDonald’s, which are national brands that have corporate-backed leases. New construction McDonald’s and Chick-Fil-A properties continue to represent the lowest cap rates in the sector (4.00% and 4.03%, respectively).
“If people are going to buy Taco Bell, Burger King or KFC, they want the largest franchisee,” Blankstein says. “People don’t want small franchisees because, in a time like COVID, they flock to quality.”
In the second quarter of 2020, franchisee-leased properties accounted for more than 70% of the market. “A lot of QSR business models have changed to focus on franchisee locations and not corporate locations because of the Wall Street asset-light model,” Blankstein says. “The theory is that they’re the brand and they don’t need to be at every stage of ownership at all of the properties.”
Regardless of the corporate backing, COVID has shown there is value in the QSR sector.
While many restaurants had to shut their doors during the pandemic, drive-through lanes helped most QSR operators to limit the impact of reduced in-store dining on their businesses. Not only do drive-throughs over convenience, but they also limit exposure to others.
Blankstein says the single tenant QSR sector will continue to attract investors.
“Everyone saw that drive-throughs and mobile delivery services like UberEATS and Grub Hub, made QSRs COVID resistant,” Blankstein says. “Everyone understands the drive-throughs are more critical than ever.”