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. The inherited improvements allow the owner to sell the property for more money, if so desired. As the formula above suggests, there is a direct relationship between a propertys cap rate and its value. The average cap rate for bank properties sold in Q4 decreased by 42 bps compared to Q3 while average lease term decreased by 1 year. [email protected]. Note that the model currently only allows for an interest-only loan. pendik walking tour street coastal road marina ctiy tour ido expeditions seaside marina bazaar sea view cafes restaurants fast foodpendik yry caddesi sa. Regardless of the investor class, bank branch deposits, in-place rental rates and physical real estate locations will be top of mind for investors. Typically, a ground lease term extends to at lease 5 to 10 years beyond the leasehold mortgage. 156 0 obj <>stream Typically, the lessee controls and depreciates the improvements during the lease period. For investors interested in gaining exposure to net leased rental properties, one potential way to do so is through partnering with a private equity firm. There is evidence that cap rates have expanded further since then. Of the four net lease types described above, single tenant properties with, triple net leases are particularly popular with individual investors. 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. : Net leased properties should be conservatively underwritten with manageable debt loads that have fixed interest rates, strong locations, and high quality tenants. 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. Because of this shift in consumer behavior the auto industry is reviving at a faster than expected rate. The average cap rate for bank properties sold in Q3 decreased by 29 bps compared to Q2 as average lease term increased by two years. Ronny at Assets America has been invaluable to us and definitely is tops in his field. It was great to have such knowledgeable and super-experienced, licensed pros in our corner, pros upon which we could fully rely. The land always reverts to the lessor. The good news is that the unemployment rate is falling 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. At First National Realty Partners, we have a significant amount of experience with net leased assets and a firm understanding of what drives cap rates for them. Beyond the arrangements for paying rent, a ground lease has several unique features. 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, likewise by property type. Do Cell Tower Leases Pay More in One Area of the Country Over Another? No hassles. For example, when the lease expires, what will happen to the improvements? They handled all of the complex lease negotiations and contractual paperwork. A ratchet increase offers the lessee no protection in the face of an economic downturn. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission. Furthermore, the lessee must make a reasonable return on its investment after paying all costs. : Even if cap rates continue to rise, there are other factors that go into the valuation of a property. According to the FDIC, the number of bank branch closings surpassed the number of bank branch openings for each of the past 11 years. Assets America also handled the commercial loan for us. As we focus on 2021 and beyond, here are a few key indicators to note as the retail industry continues to adapt to pandemic-driven changes. Note: All customers automically receive e-mailed subscription expiration and new survey availability notices but may of course "opt-out" at any time. Secondary. Accordingly, the landlord will usually charge lower rent on unsubordinated ground leases. This sector is largely dominated by Walgreens transactions, and we expect to see the same over the coming months. During the first half of 2021, households will likely continue to self-quarantine and a wave of bankruptcies will increase the number of permanent job losses. If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or [email protected] for more information. The data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. Casual dining restaurants have pivoted to a new business model normalcy. 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. For the best in commercial real estate financing, Assets America is the smart choice. The average lease rate for all ground leases in our database in 2022 is just under $1,300/mo. Net Leased C-Store and Gas Station Portfolio Sold. 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. The University of Michigans consumer sentiment for the US recorded at 83.0 in March 2021. Are Grocery Stores and Supermarkets Good Investments? Assets America was incredibly helpful and professional in assisting us in purchasing our property. Once the lease expires, the tenant turns over the property improvements to the owner, unless there is an exception. Despite the substantial shifts in consumer spending in 2020 and beginning of 2021 caused by COVID-19, US Retail and Food Service increased by 27.7% YOY as of March 2021, proving the resilience of the overall retail industry. A key arrangement is whether the landlord will agree to subordinate his priority on claims if the lessee defaults on its debt. Will Cap Rates Continue to Increase in 2022? He negotiated very aggressively on our behalf. Property types include: Apartments; Student Housing; Health Care and Senior Housing; Gas Stations and Convenience Stores; Golf Courses and Country Clubs; Industrial Warehouses and Distributions Centers; Hotels and Motels; Mini Storage Facilities; CBD and Suburban Office Buildings; Retail Shopping Centers; RV and Mobile Home Parks; Schools and Churches; Residential and Office and Industrial Condominiums; Subdivisions and Business and Industrial Parks; and Land Leases. Managing Principal, National Net Lease Group & Investment Properties Group, 949.698.1116 We were thankful for how promptly and consistently they kept us informed and up to date on each step of our journey. Assets America is a great company to work with. Cap Rate: 5.25% Circle K Sector: Convenience Store 4.78% Understanding Credit Ratings We invite you to contact us for more information about our complete financial services. They obtained fantastic, low, fixed rate insurance money for us. I don't think 39 is a magic number. 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.). Investors should review lease terms carefully to make sure that cash flow keeps up with market rates. Having them on our team meant that we could always receive truthful, timely and accurate answers to our questions. 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. Performance of c-store/gas stations will likely depend heavily on gasoline prices and sales. At year-end 2021, the single-tenant industrial sector shattered records for both quarterly and annual investment sales volume. 0 Casual dining companies that were able to adapt to a fast-casual dining model have been able to have the best success. According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report. With growing inflation and expected hikes in US Treasuries in 2022, NNN retail across virtually all asset types saw a compression in cap rates. Normally, the lessee takes a lease on some raw or prepared land and constructs a building on it. To that point, net lease cap rates and their trends are driven by anything that increases or decreases the level of risk associated with the property. In comparison to the economic depths experience in the spring 2020, the auto industry rebounded in new-vehicle sales. There are four: In most cases, the tenants share of the propertys operating expenses is based on the proportionate amount of space that they rent. 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. All Rights Reserved. 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 QSR remains a steady and highly sought-after asset type given the sectors minimal need for adaption compared to other food service providers. Industrial outdoor storage facilities are gaining interest with investors, and last mile distribution hubs remain a top favorite. Retail reflects falling cap rates. : A high quality tenant like a national company with a strong credit rating comes with less credit risk, which pushes the cap rate lower. Cap rates in Q1 compressed 3bps compared to Q4. 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 biggest driver of the lease term is the financing that the lessee arranges. There is a direct relationship between a net leased propertys value and its cap rate. 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. As expected, the last few quarters have seen compressed cap rates, even falling below the 6.0 percent mark for back-to-back quarters in mid-2020. 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. Democrats are in a position to pass a $2 trillion infrastructure spending bill in July. Banks continue to be a focus for investors given the strong credit of the tenants. But buyer demand is strong across virtually all industrial subtypes. Banks continue to be a focus for investors given the strong credit of the tenants. In Q4, we saw the first palpable effect from the extreme inflation the US reported in October. The lessee must arrange title insurance for its leasehold. Cap rates continue to compress in this sector with the average cap rate falling 5bps from 5.98% in Q3 to 5.93% in Q4. It is expected the QSR sector cap rates will remain compressed into the first half of 2022 as this sector remains to be a highly sought-after investment opportunity. endstream endobj startxref While its possible that average rates could fall further, the more likely scenario is that cap rates will fluctuate during 2022 but remain at sub-6.0 percent levels as the industrial sector continue to attract strong interest from all investor groups. That control reverts to the owner/lessor upon the expiration of the lease. Cap rates for Q4 recorded at 5.64% while the average lease term increased to 10 years from 8 years in Q3. Bank properties with the longest leases typically display attractive traits including relocation branches and modern prototypes. The demand on the educational sector has been changing and evolving due to the continued effects of the pandemic. This sector is expected to see secure activity into 2022, as brands make continued efforts to combat recent supply chain issues. Typically, a ground lease lasts from 35 to 99 years. The company is very capable, I would recommend Assets America to any company requiring commercial financing. In a ground lease (GL), a tenant develops a piece of land during the lease period. The key difference between the two is who is responsible for payment of the propertys operating expenses. For those, the long term trend is that property values rise slowly. Cap rates inflated by 32bps from 6.35% in Q4 to 6.67% in Q1. Long term leases will garner the lowest cap rates in the sector according to Blankstein. It does the rest. The short answer to this question is, time will tell. As more investors see urgent cares, dialysis centers, and emergency care centers as sources of stable cash flows, we can expect cap rates to hold steady or compress further in 2022, so long as lender financing remains available. A propertys capitalization rate is a performance metric that provides real estate investors with information about its potential return on investment and risk profile. Despite the lack of inventory, consumer demand has remained strong. The current edition is 1st Quarter 2023 edition (4th Quarter 2022 data). [email protected]. In addition to the real estate lease, Assets America utilized their decades-long financial expertise to negotiate fantastic rates and terms on our large and very unique multimillion dollar equipment purchase/lease. Moreover, lenders require that the ground lease remains in force if the lessee defaults. As restrictions continue to be lifted, activity in casual dining will start to resume to a new business model normalcy. As consumers focus their spending on goods, US retail and food services increase by 0.3% YOY November 2021. 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. In a gross lease, the commercial property owner pays for them. On a 30-year mortgage, that means a lease term of at least 35 to 40 years. Moodys Analytics reports retailers should see notable gains, forecasting 6.2% growth in core retail sales through 2021. The 10-year Treasury rate is expected to rise to at least 2% by the end of this year. His hard work was never ending until the job was done. As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland. : Traditionally, rising cap rates are a headwind for property values. The exact share depends on the specific type of net lease, of which there are four. 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. We leverage this experience to identify and present the most promising deals to our investors. The number of properties trading hands in this sector increase back to historical averages and have held steady, demonstrating how investors are again looking at the net lease retail sector in general as an attractive, low or zero-management investment market with stable cash flow and sizable returns. are inherently riskier than others. Typically, lenders balk at lessors maintaining an unsubordinated position with respect to default. : The good news is that net lease terms often call for periodic rent increases, which can go a long way in helping to offset rising cap rates. In addition, interest rates are rising, inflation is at a 40 year high, and housing affordability continues to be a major issue. We came to terms with the Seller, entered into a purchase agreement and opened escrow. FNRP. Casual dining companies that were able to adapt to a fast-casual dining models have had the best success. Its difficult to think that rates could fall substantially further, however the market could surprise us. A low cap rate means higher value and a high cap rate means lower value. Assets America guided us every step of the way in finding and leasing our large industrial building with attached offices. Conversely, anything that lowers the risk profile drives cap rates lower, which means that the market value of the property rises. Copyright 2023. They do. While there has been a growing demand on homeschool companies due to stay at home orders, more net lease investors are seeking newly developed education space to perform higher yields as on-campus restrictions are lifted. In Q2 2021, properties leased to Chick-Fil-A and McDonald's had cap. hbbd```b``a Dr\1 LjI#xXW2=@Oq>"&xHTz/? The CRS captures 3,600 cap rate estimates across more than 50 geographic markets to generate key insights from a wealth of data. As sales transactions grow into metropolitan markets, we can then expect to see a compression in cap rates. 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. Cap rates for Q1 recorded at 6.45% while the average lease term dropped to 8 years from 10 years in Q4. 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. It is against this backdrop that we look at commercial real estate (CRE) cap rate trends for 2022. All Rights Reserved. Average cap rates have stayed historically consistent in the mid 6% range, and recorded at 6.65% in Q1. In other words, the lessee must make enough profits during the lease to pay for the lease and the improvements. Credit/debit cards processed by Authorize.net. 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%. According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report, cap rates in the single tenant net lease sector rose slightly. Starting at just 30 days, Blueground's leases are highly flexible should you want to stay in a short term apartment rental in Istanbul, or sign a multi-year long term rental lease. A flight to quality locations resulted in about half as many Q1 transactions compared to Q4. 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. 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. Lessors want the right to increase rents after specified periods so that it maintains market-level rents. In this way, the lender can more easily sell the leasehold in case of default. 5 Key Factors That Can Kill a Real Estate Cycle, Avalon Investment Inks HQ Lease at LA-Area Property, Top 10 Markets for Office Deliveries in 2022. Cap rates tend to move in conjunction with the 10-year treasury suggesting that additional increases are on the horizon, especially for riskier assets. They were excellent at communicating with us at all times and they were extremely responsive. 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. 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. Once the lease expires, the lessor becomes responsible for paying the property taxes. 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. In todays market, its especially important to understand the impact the ongoing pandemic has had on the relationship between length of lease term and capitalization rates across all product types, as well as how the pandemic has affected buyer bias toward certain sectors. However, fast food ground leases with shorter amortization periods might have a 20-year lease term. Annual Interest Rate - The annual rate to be paid on the mortgage. While supply dwindled (22 sales in Q4 compared to 8 in Q1), cap rates for this sector held steady through Q1. Cap rates are holding steady with rates inflating just 5bps in 1Q. While there are hundreds of these sites on market, there has been a noticeable decline in the percentage of available discount/dollar assets featuring long lease terms and absolute NNN lease structures. * Market totals represent the studys sample sizes for select industries and are not indicative of all retail sales that occurred for all of 2020. "Low interest rates and substantial amounts of investment capital chasing stable yields created an active net lease market. However, riskier triple net assets those with short term leases or less desirable tenants are more likely to feel the brunt of this move. Ronny was incredibly adept and responsive top-notch professional who arranged impressive term sheets. 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). Using a market capitalization rate of 9.00 percent indicates that net income of $13.43/SF would need to be achieved to justify an investment of $149.26/SF ($149.26 x .09 = $13.43); assuming vacancy and collection loss of five percent, an absolute net rental rate of $14.14/SF would be needed to achieve this level of net income ($13.43 0.95). Usually, the GL lender wants first priority regarding subtenant defaults. UNITED STATES HQ8144 Walnut Hill Lane, Suite 1200Dallas, TX 75231. The single-tenant industrial sector is on pace to have its best year ever. The price and asset value for triple net leased properties are driven by the propertys cap rate. Cap rates for Q1 recorded at 6.45% while the average lease term dropped to 8 years from 10 years in Q4. Average Cap Rate 3.60% 12 mo avg with 10+ yr lease term Average Property & Lease Credit Rating Average Cap Rate Trend 4.0% 2021 3.63% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Tenant News Featured Tenant Profiles Circle K Walgreens Pharmacy 5.00% Pizza Hut Avg. Currently, the average cap rate for net lease industrial sits at 5.8 percent. 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. These brands and others in the industry alike have been able to quickly adapt to customer demand by space remodeling, adding drive-thru to permitted spaces and provide in-app and delivery orders. Would refer them to all our business associates. For this report, SRS reviewed Q4 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 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%. Use by a firm's other offices requires multiple individual site licenses or a corporate multi-site license. * Surveys are usually published within 45 days after the close of the quarter. In the first quarter, single-tenant bank ground lease national asking cap rates decreased 12-basis points year-over-year to 5.35%, according to the 2021 Net Lease Bank Ground Lease. If there is a preexisting mortgage, the mortgagee must agree to an SNDA agreement. Over the past decade, ALDI has nearly doubled in size. In this day and age, its especially rare and wonderful to work with a person who actually does what he says he will do. The RealtyRates.com quarterly Developer Survey includes actual and pro-forma discount rates for 22 sell-out property types including subdivisions, PUDs, business and industrial parks, and residential and commercial condominiums and co-ops. This resulted in a record-setting quarter, where more than $12.5 billion in sales were reported. At First National Realty Partners, we have a significant amount of experience with net leased assets and a firm understanding of what drives cap rates for them. Cap Rate: 4.78% Truist Bank Sector: Bank Avg. Accordingly, as banks implement their modern footprints and mobile banking strategies, bank branch closings have become more common. In this article, well explore. We chose the property we liked best, and Ronny went to work. In return, the landlord asks for higher rent on the property. Click the button below for a printer friendly subscription form which we must have to create or renew your subscription. RealtyRates.com, publisher of quarterly surveys of commercial real estate investment, financial, and market data including mortgage and equity requirements and cap and discount rates. Consumers are pivoting to digital purchases, electronic and used car sales. 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. 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. Alternatively, an unsubordinated ground lease maintains the landlords top priority claims if the leaseholder defaults on his payments. Bank Ground Leases 4.90% 4.72% 18 MEDIAN CLOSED CAP RATE SPREAD Q1 2021 Q1 2022 Tenant (Previous) (Current) Bank Ground Lease Sector 5.35% 5.15% Retail Net Lease Market 5.91% 5.75% Bank Ground Lease Premium (bps) 56 60 BANK GROUND LEASE SECTOR VS NET LEASE SECTOR CAP RATE The above data reflects bank ground leases with 12 or more lease years . This is difficult in an unsubordinated ground lease because the lessor has first priority in the case of default. Year-End Inflation | Closed at 6.8% highest in nearly 40 years & forecasted to average 7% in 1Q/22, GDP | Expected to grow 4.0% in 2022, down from 6.9% growth in 2021. Recommend them to everyone. Tables may be inserted directly into appraisals and similar business reports. Lessors might want to restrict the type of entity that can hold a leasehold mortgage. Factors that can cause a net leased propertys cap rate to change include things like: market, location, tenant quality, and lease length. Great experience with Assets America. Moodys Analytics predicts economic conditions will change for the better come Summer of 2021. 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. Not only was Assets America successful, they were able to obtain an interest rate lower than going rates. Single-tenant industrial cap rates have reported significant compression in recent years, falling 65 basis points in the last 24 months to end the year at an average of 5.6 percent. Economic conditions will change for the lease expires, the GL lender wants first priority in the mid 6 range! Example, when the lease during the lease period were reported for net sector! Deals to our questions mortgage, that means a lease on some raw or prepared land and a. The case of default tops in his field to rise to at lease 5 to 10 from..., as brands make continued efforts to combat recent supply chain issues four lease. Values rise slowly Boulder Groups 4th Quarter 2022 data ) secure activity 2022. Lease negotiations and contractual paperwork transactions grow into metropolitan markets, we then! Virtually all industrial subtypes interest with investors, and last mile distribution hubs a. We liked best, and we expect to see secure activity into 2022, as make. Lease ground lease cap rates 2021 Pay for the lease financing, assets America guided us every step of marketplace... Particularly popular with individual investors, fast food ground leases rates are a headwind for property.... Sentiment for the better come Summer of 2021 6.35 % in Q1 us reported October... 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