2022 Assets America, Inc. All Rights Reserved. The lender controls insurance proceeds stemming from casualty and condemnation. Despite retail bank headwinds, The Boulder Group cites tenant credit and low interest rate as the primary reasons. The impact of the pandemic forced the banking industry to dive into new digital banking transformation as bank branches continue to pivot to new business models. The sector is largely dominated by Walgreens transactions. Cap Rate: 4.78% Truist Bank Sector: Bank Avg. In the retail sector, they inched up a few basis points to an average cap rate of 5.88% and in the industrial sector they averaged 6.77%. In particular, the so-called risk free rate on the 10-year US Treasury has risen from 1.08% to ~1.70% in the first few weeks of 2022, the fastest increase in nearly 20 years. Analysis has accounted for sales as reported to sources deemed reliable in the following sectors: Automotive, Bank, Casual Dining, C-Store, Dollar Stores, QSR, Medical, Pharmacy, Childcare, Fast Casual, Grocery, Big Box, and General Retail (Fitness, Hardware, Furniture, Cellular Stores, etc.). In a ground lease (GL), a tenant develops a piece of land during the lease period. However, the lender will seek to restrict this right. That control reverts to the owner/lessor upon the expiration of the lease. We'd love to get in touch with you about how we can assist you with your retail real estate needs. Use by a firm's other offices requires multiple individual site licenses or a corporate multi-site license. Inflation closed out the year at 6.8%, the highest seen since 1982. Upon foreclosure of the property, the lender receives the lessees leasehold interest in the property. As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland. 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. Quarterly sales volume was down across all regions of the single-tenant industrial market in first quarter 2021, however, the data is a bit deceiving. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in. 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. QSR remains a steady and highly sought-after asset type given the sectors minimal need for COVID-19 adaption compared to other food service providers. It does the rest. Some ground leases extend as far as 99 years. The lender only has the right to claim the leasehold. Consequently, these properties experienced the greatest amount of compression in the sector.. Overall, they provided my team with a fantastic and highly professional service! As schools continue to open their campuses to students, cap rates for educational NNN properties compressed by 51 bps in Q1 with average lease terms increasing to 14 years. A key arrangement is whether the landlord will agree to subordinate his priority on claims if the lessee defaults on its debt. The latest wave of Covid is also likely to prompt an economic slowdown as some restaurants and retails have had to shut locations or reduce hours as they cope with staff and inventory shortages. The RealtyRates.com quarterly Market Survey includes sales, rent, occupancy, and operating expense data, together with eepense ratios, cap rates and gross rent and effective gross income multipliers for seven core commercial property types including apartments; warehouses and distribution centers; flex/R&D facilities; CBD and suburban offices; and anchored neighborhood and community and unanchored strip retail centers. The demand on the educational sector has been changing and evolving due to the continued effects of the pandemic. Casual dining companies that were able to adapt to a fast-casual dining models have had the best success. If they are the sole occupant, their share is 100%. As we enter 2022, the net lease market is working to digest a substantial amount of news, both good and bad. A ground lease is more complicated than regular commercial leases. Average cap rates for single-tenant industrial assets have compressed substantially in recent years, falling more than 100 basis points since the mid-2010s. COVID-19 Vaccination | 39.6 Million People in the U.S. Have Received Their First Dose, Startups are Growing | 1.1 Million New Business Applications in 4Q/2020, Evolving Work Force Environment | Remote Work & Space Hybrid Conversions, $2 Trillion in Savings Deposits | Americans Accumulated Since February 2020. The land always reverts to the lessor. 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. The demand on the educational sector has been changing and evolving due to the impact of COVID-19. Cap rates stayed flat recording down by just 1 bps in 4Q to 4.86% while average price per square foot increased by 14.6%. patrick.luther@srsre.com, 954.302.7365 Are Grocery Stores and Supermarkets Good Investments? The University of Michigans consumer sentiment for the US recorded at 83.0 in March 2021. Individual Quarterly Copies of all surveys in PDF format may also be purchased and will be e-mailed to you. The CRS captures 3,600 cap rate estimates across more than 50 geographic markets to generate key insights from a wealth of data. The region may also see record-setting activity, as with nearly $8.5 billion reported, year-to-date investment activity has already surpassed 2020 annual totals. Assets America guided us every step of the way in finding and leasing our large industrial building with attached offices. Average Property & Lease Credit Rating Average Cap Rate Trend 4.50% 2021 4.50% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Tenant News Featured Tenant Profiles Burger King Sector: QSR Avg. The key difference between the two is who is responsible for payment of the propertys operating expenses. hbbd```b``a Dr\1 LjI#xXW2=@Oq>"&xHTz/? They obtained fantastic, low, fixed rate insurance money for us. Starbucks concept is to sell decommissioned shipping containers as an environmentally friendly alternative to conventional construction. The c-store/gas station space remains to be a very active sector of net lease given the internet resistant foundation as well as being labeled as an essential business. In Q4, an investment sale to note was Home Depot located in Anaheim, CA, which is the largest Home Depot location on the West Coast, traded at $53 million ($259 PSF). Net Leased C-Store and Gas Station Portfolio Sold. To do so, we compiled the following average summary reports for a number of data points throughout each mentioned sector. While portfolio sales have been leading contributors to overall volume, we continue to see very robust levels of single-asset sales as investors chase well-located, high-quality, newly built facilities across the distribution, cold storage and last-mile sectors, among others. are inherently riskier than others. As an alternative, a ground lease could theoretically refer to some objective third-party index for long-term capitalization rates for real estate investments at the time of the rent reset. 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. Lessors want the right to increase rents after specified periods so that it maintains market-level rents. 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. Due to the delay issues with supply chain operations and chip shortages, the automotive industry has been directly impacted as available inventory has become very limited. $100 million purchase price 6% going -in cap rate $35 million equity contribution $65.0 million loan 65% LTV fee simple value; 9.2% debt yield $49.2 million Leasehold Value 8% cap rate At year-end 2021, the single-tenant industrial sector shattered records for both quarterly and annual investment sales volume. The lender must have recourse to protect its loan if the lessee defaults. Once the lease expires, the lessor becomes responsible for paying the property taxes. Retailers are continuing to adjust store square footages as some are being transformed into mini fulfillment centers for shoppers to pick up their orders and others are downsizing store footprints for cost efficiently. While these were slight increases, they remain at historically low levels driven by low interest rates and a significant amount of institutional capital chasing the stable yields that net lease properties can deliver. 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. But buyer demand is strong across virtually all industrial subtypes. UNITED STATES HQ8144 Walnut Hill Lane, Suite 1200Dallas, TX 75231. Lessors might want to restrict the type of entity that can hold a leasehold mortgage. In the retail sector, they inched up a few basis points to an average cap rate of 5.88% and in the industrial sector they averaged 6.77%. As sales transactions grow into metropolitan markets, we can then expect to see a compression in cap rates. Secondary. Regardless of the investor class, bank branch deposits, in-place rental rates and physical real estate locations will be top of mind for investors. 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. *Market totals represent the studys sample sizes for select industries and are not indicative of all retail sales that occurred for all of 2021. Focusing on business development, industry and client-specific research, and the analysis of local and national market trends, Lanie Beck has been the Director of Research for Stan Johnson Co. since 2013. 156 0 obj <>stream The cap rate formula is: Cap Rate = Net Operating Income / Market Value. Casual dining companies that were able to adapt to a fast-casual dining model have been able to have the best success. The Discount Dollar sector continues to be one of the most highly sought-after spaces as investors target growth opportunities given high volume of sale transactions being made in comparison to other retail sectors. 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. Why do lenders have an adverse reaction to ground leases around year 39? However, this may conflict with the standard wording of a ground lease, which gives some control to the lessor. A flight to quality locations resulted in about half as many Q1 transactions compared to Q4. This is because tenants tend to be willing to pay higher rents for newer properties. 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. The discount dollar sector continues to be one of the most highly sought-after spaces as investors target growth opportunities. Tables may be inserted directly into appraisals and similar business reports. "Low interest rates and substantial amounts of investment capital chasing stable yields created an active net lease market. This sector is expected to see secure, positive activity through 2021. 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 The exact share depends on the specific type of net lease, of which there are four. 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. As schools continue to open and/or close their campuses to students, cap rates for educational/childcare NNN properties increased into the 7% range at 7.26% in Q4 with average lease terms recording at 12 years. Strong activity throughout the sector shouldnt come as a surprise though. Just $159 per office (not per user) per year. The advantages of a ground lease include: The disadvantages of a ground lease include: This is a great commercial lease calculator. This breaks down to retail trade sales recording an increase of 16.1% YOY, while gasoline stations were up 52.3% and food and beverage services were up 37.4% YOY. How to Build a Strong Commercial Real Estate Portfolio, How to Invest in Shopping Centers Through a Private Equity Real Estate Firm. In a net lease, the tenant is responsible for some or all of them, depending on which type of net lease they have signed. The increase purchases in goods will likely compound inflation as demand remains high and supply chain challenges continue. The impact of COVID-19 has forever changed most restaurant business functions. In a gross lease, the commercial property owner pays for them. 2 Bedrooms Rental Houses in Istanbul. Further, QSRs typically offer a lower price point and a higher percentage of absolute NNN lease types for investors compared to other sectors. 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. My business partner and I were looking to purchase a retail shopping center in southern California. They handled a complex lease and guided us through entire process, including the paperwork. This sector consists largely of credit-worthy brands like Panera Bread and Chipotle. This gives the GL a maximum term of 30 years. Typically, the lessee controls and depreciates the improvements during the lease period. Now that weve discussed the relationship between cap rates and property values, lets talk about where they may be headed in 2022. Assets America also handled the commercial loan for us. Casual dining restaurants have pivoted to a new business model normalcy. The lenders requirements for applying the condemnation proceeds and controlling termination rights mirror those for casualty events. These facts are reflected in 2021s record transaction volume of $90+ billion. We expect to see a large influx of dark or subleased CVS assets hit the market throughout the year ahead. Cap rates are holding steady with rates inflating just 5bps in 1Q. In summary, Mr. DeMita said, "Given that even individual cell towers are selling for 20-24 times ANOI or higher and, depending on the escalation provisions inherent in the lease, rooftop and ground leases are now commonly trading for 18-20 times annual rent (equivalent to cap rates as low as 5%), it is a good time to be a wireless landlord." 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. Tenant pays base rent plus their share of property taxes, insurance, and maintenance. The firm provides a full range of brokerage, research, advisory, and financing services nationwide. Lessees want the right to obtain a leasehold mortgage without the lenders consent. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission. Figure 1 shows the degree to which multifamily and industrial yields dominate the lower end of the pricing curve. Cap rates for Q4 recorded at 5.64% while the average lease term increased to 10 years from 8 years in Q3. They were excellent at communicating with us at all times and they were extremely responsive. We were thankful for how promptly and consistently they kept us informed and up to date on each step of our journey. Expect this sector to continue to outperform other sectors as flight to safety and recession resistance remains to be a target for investors. Revenue for C-Stores is expected to grow at an annual rate of 1.5% until 2026. They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. Typically, a ground lease term extends to at lease 5 to 10 years beyond the leasehold mortgage. Get instant access to all of our current and past commercial real estate deals. In this article, well explore. : Strong markets like major metro areas with high population growth command lower cap rates because they are considered less risky. The RealtyRates.com quarterly Investor Survey includes national mortgage terms and interest rates, equity requirements, cap and discount rates, reserve requirements, and interim financing rates and terms for 32 income producing property types, plus financial indicators, historical cap rate trend data, and land lease cap and discount rates, This requires special endorsements to the regular owners policy. By 2022, ALDI will bring its total number of US stores to nearly 2,500. www.aldi.us Average Cap Rate 4.18% 12 mo avg with 10+ yr lease term Average Property & Lease Credit Rating Average Cap Rate Trend 4.65% 2021 4.35% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Still, quality assets within this sector will continue to be sought after by the majority of investors moving forward. to historic lows, the government is set to invest a record amount in national infrastructure, and wages are rising across the board for workers as companies compete for talent. endstream endobj startxref In Q2 2021, properties leased to Chick-Fil-A and McDonald's had cap. While sales volume decreased from last quarter (16 in Q3 compared to 9 sales in Q4), cap rates for this sector decreased 10 bps to 4.63%. 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. 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. So, Assets America handled both the sale and the loan for us and successfully closed our escrow within the time frame stated in the purchase agreement. Will a Recession Lower Your Property Taxes? Ronny found us several commercial properties which met our desired needs. RealtyRates.com is headquartered in Bradenton, Florida - Offices in New York, Boston, Chicago, Atlanta, Dallas, Denver, San Francisco, Los Angeles,and Honolulu. Market activity greatly surpassed expectations in fourth quarter 2020 as investors rushed to close deals before year-end. Annual Online Subscriptions include access to both HTML and PDF versions and all previous editions, as well as such other free resources as Excel templates, special reports, software, and investment and financial calculators. Because of this shift in consumer behavior the auto industry is reviving at a faster than expected rate. There are four: , the tenant pays base rent plus their share of property taxes. The following data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. However, fast food ground leases with shorter amortization periods might have a 20-year lease term. A propertys capitalization rate cap rate for short is a performance metric that describes the ratio between its net operating income (NOI) and value. SRS National Net Lease has closed, year to date this year, 180 properties, up approximately 17% from this time in 2021, with over 230 properties under contract, also 14% higher than this time. For the third consecutive year, the median term remaining for the bank ground lease sector was below 10 years., Net lease investors will continue to monitor the bank sector following the Covid-19 environment which temporarily closed many bank branches aside from drive-thrus. Through 2021, cap rates are expected to hold steady as most sales transactions in this sector are trading hands in suburban markets. 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. 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. Highly recommend them to anyone looking for financing. In a gross lease, the commercial property owner pays for them. We came to terms with the Seller, entered into a purchase agreement and opened escrow. Typically, a ground lease lasts from 35 to 99 years. Analysis has accounted for sales as reported to sources deemed reliable in the following sectors: Automotive, Bank, Casual Dining, C-Store, Dollar Stores, QSR, Medical, Pharmacy, Childcare, Fast Casual, Grocery, Big Box, and General Retail (Fitness, Hardware, Furniture, Cellular Stores, etc.). The average lease rate for all ground leases in our database in 2022 is just under $1,300/mo. The also include absolute leases, percentage leases, and the subject of this article, ground leases. Banks continue to be a focus for investors given the strong credit of the tenants. The inherited improvements allow the owner to sell the property for more money, if so desired. Bank institutions that made strategic technology investments prior to COVID-19 came out stronger. Some of the highest profile transactions continue to be Amazon-leased properties, as investors flock to the high-quality, high-credit assets. Subsets including cold storage, last mile distribution, outdoor industrial storage and others continue to be in high demand, as has been the trend over the past few years. Currently, the average cap rate for net lease industrial sits at 5.8 percent. This newly set quarterly record also pushed annual totals to a new high with more than $47.8 billion reported for the year. 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. Half as many Q1 transactions compared to other food service providers obtained fantastic low! Generate key insights from a wealth of data inflation closed out the year at 6.8 %, the controls... Gives the GL a maximum term of 30 years a ground lease the! In touch with you about how we can then expect to see secure, activity. 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