: A high quality tenant like a national company with a strong credit rating comes with less credit risk, which pushes the cap rate lower. They were very straight forward with us and helped a great deal. Bank properties with the longest leases typically display attractive traits including relocation branches and modern prototypes. Bank institutions that made strategic technology investments prior to COVID-19 have performed stronger. Bank properties with the longest leases typically display attractive traits including relocation branches and modern prototypes. When viewed through this lens, the year to year cap rate is much less important than investing in a net leased property with strong fundamentals. In Q2 2021, properties leased to Chick-Fil-A and McDonald's had cap. The single-tenant industrial sector is on pace to have its best year ever. It is against this backdrop that we look at commercial real estate (CRE) cap rate trends for 2022. These averages include rural, suburban, and urban towers including newly-built 5G towers. This may exclude confidential and/or proprietary information. 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. However, riskier triple net assets those with short term leases or less desirable tenants are more likely to feel the brunt of this move. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); document.getElementById( "ak_js_2" ).setAttribute( "value", ( new Date() ).getTime() ); This field is for validation purposes and should be left unchanged. The lease will specify whether they revert to the lessor or the lessee must remove them. Moodys Analytics reports retailers should see notable gains, forecasting 6.2% growth in core retail sales through 2021. Cap Rate: Understanding Credit Ratings This sector is largely dominated by Walgreens transactions, and we expect to see the same over the coming months. As sales transactions grow into metropolitan markets, we can then expect to see a compression in cap rates. However, one remedy is a clause that requires the successor lessee to use the lender to finance the new GL. 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. 10-Year Treasury Note | Expected to rise to 2.1% in 2022, up from the current rate of 1.52%. Inflation closed out the year at 6.8%, the highest seen since 1982. In other words, the lessee must make enough profits during the lease to pay for the lease and the improvements. RealtyRates.com is headquartered in Bradenton, Florida - Offices in New York, Boston, Chicago, Atlanta, Dallas, Denver, San Francisco, Los Angeles,and Honolulu. In this way, the lender can more easily sell the leasehold in case of default. matthew.mousavi@srsre.com, 949.698.1115 Highly recommend them to anyone looking for financing. The initial lease terms, on an annual basis, were: Ground leases have their advantages and disadvantages. 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. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission. Alternatively, an unsubordinated ground lease maintains the landlords top priority claims if the leaseholder defaults on his payments. For example, net leased properties with short lease terms remaining or those with non-credit tenants may see larger swings in value than those with long term leases and credit tenants. Unsurprisingly, lenders want the insurance proceeds to go toward the loan, not property restoration. 2022 Assets America, Inc. All Rights Reserved. Typically, ground leases are triple net. We recommend them to anyone needing any type of commercial real estate transaction and we further highly recommend them for any type of commercial financing. According to The Boulder Group's 4th Quarter 2021 Net Lease Research Report, cap rates in the single tenant net lease sector rose slightly. 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. The following data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. They do. 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. Ronny was very friendly and though we were unable to make something happen at the moment he gave me some direction to go. This sector is expected to see secure, positive activity through 2021. Note that the model currently only allows for an interest-only loan. As the formula above suggests, there is a direct relationship between a propertys cap rate and its value. Regarding condemnation, lenders insist upon participating in the proceedings. Beyond the arrangements for paying rent, a ground lease has several unique features. 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. A low cap rate means higher value and a high cap rate means lower value. Conversely, anything that lowers the risk profile drives cap rates lower, which means that the market value of the property rises. 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. Sometimes, the land has a structure already on it that the lessee must demolish. 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. This may exclude confidential and/or proprietary information. A propertys capitalization rate cap rate for short is a performance metric that describes the ratio between its net operating income (NOI) and value. The average cap rate for these assets compressed to 5.61% in Q4. According to the FDIC, the number of bank branch closings surpassed the number of bank branch openings for each of the past 11 years. : Even if cap rates continue to rise, there are other factors that go into the valuation of a property. 2021 Net Lease Industrial Sales and Cap Rates. It hasn't changed from 2021 but is up from 2018 when it was $1,220/mo. Once the lease expires, the tenant turns over the property improvements to the owner, unless there is an exception. I highly recommend them to anyone needing commercial financing. Ronny at Assets America has been invaluable to us and definitely is tops in his field. %PDF-1.7 % Performance of c-store/gas stations will likely depend heavily on gasoline prices and sales. FNRP. Individual Quarterly Copies of all surveys in PDF format may also be purchased and will be e-mailed to you. The first is that the lessor takes possession of all improvements that the lessee made during the lease. Investor Survey. For individual investors who are interested in this asset class, partnering with a private equity firm is a good way to gain fractional ownership of institutional quality, net leased assets. 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. Cap rates for Q4 recorded at 5.64% while the average lease term increased to 10 years from 8 years in Q3. Assets America also handled the commercial loan for us. We leverage this experience to identify and present the most promising deals to our investors. which we must have to create or renew your subscription. 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. In this day and age, its especially rare and wonderful to work with a person who actually does what he says he will do. Thats precisely what happens in a subordinated ground lease. 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. Given the medical industry has been deemed as one of the most important sectors due to the correlation impact of the pandemic, single tenant net leased medical properties average cap rates experienced a sharp compression of 54 bps, down to 5.91% in Q4. Lessors want the right to increase rents after specified periods so that it maintains market-level rents. In a ground lease (GL), a tenant develops a piece of land during the lease period. who want exposure to commercial real estate assets, but not the hassle of managing them on a day to day basis. The short answer to this question is, time will tell. Figure 1 shows the degree to which multifamily and industrial yields dominate the lower end of the pricing curve. Normally, the lessee takes a lease on some raw or prepared land and constructs a building on it. The second is that the lessee must demolish the improvements it made. 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. Average cap rates compressed by 56bps to 5.58% during Q1 due to increased consumer demand, as most grocery stores are comprised of strong, high credit tenants Kroger, Albertsons, Sprouts, Aldi etc. 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. 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. 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. We were very pleased with Assets Americas expertise and prompt response to our inquiry. 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. 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. 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. No hassles. patrick.nutt@srsre.com. 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. Banks continue to be a focus for investors given the strong credit of the tenants. 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. As we enter 2022, the net lease market is working to digest a substantial amount of news, both good and bad. 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. Cap rates in Q1 compressed 3bps compared to Q4. 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. 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. According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report. Over the past decade, ALDI has nearly doubled in size. Assets America was responsible for arranging financing for two of my multi million dollar commercial projects. Also to note, many sales in Q1 took place in California, a state which inherently commands lower cap rates. Tenant pays base rent plus their share of property taxes, insurance, and maintenance. This increase could create challenges for buyers to obtain ideal financing. Great experience. 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 tenant pays base rent plus their share of property taxes and insurance. The advantages of a ground lease include: The disadvantages of a ground lease include: This is a great commercial lease calculator. A flight to quality locations resulted in about half as many Q1 transactions compared to Q4. In Q4, we saw the first palpable effect from the extreme inflation the US reported in October. However, fast food ground leases with shorter amortization periods might have a 20-year lease term. At year-end 2021, the single-tenant industrial sector shattered records for both quarterly and annual investment sales volume. In order to understand net lease trends, it is first necessary to understand what net leases are. These facts are reflected in 2021s record transaction volume of $90+ billion. 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. These are mortgages financing the lessees improvements to the ground lease property. Managing Principal, National Net Lease Group & Investment Properties Group, 949.698.1116 We'd love to get in touch with you about how we can assist you with your retail real estate needs. patrick.luther@srsre.com, 954.302.7365 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. We later used Assets America for a unique equipment financing deal where once again Ronny and team exceeded our expectations and our timeline. On a 30-year mortgage, that means a lease term of at least 35 to 40 years. 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. The data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. To do so, we compiled the following average summary reports for a number of data points throughout each mentioned sector. In a net lease, the tenant is responsible for some or all of them, depending on which type of net lease they have signed. As consumers focus their spending on goods, US retail and food services increase by 0.3% YOY November 2021. Furthermore, the lessee must make a reasonable return on its investment after paying all costs. Despite retail bank headwinds, The Boulder Group cites tenant credit and low interest rate as the primary reasons. Lenders want the GL to serve as collateral should the lessee default. 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. Recommend them to everyone. Basically, the provision would allow any legal purpose for the property. matthew.mousavi@srsre.com, 949.698.1115 The GL specifies who owns the land and the improvements, i.e., property that the lessee constructs. 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. Still, quality assets within this sector will continue to be sought after by the majority of investors moving forward. 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. We referred them to all our business associates. 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 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. This additional aid to funds is expected to boost economic growth and push up both inflation and interest rates. With these factors in mind, current market indicators seem to indicate that cap rates will rise, albeit slightly, throughout the year. Despite banks being challenged with keeping their distribution channels open due to social distancing logistics and compliance functions that were never designed for remote work, the average cap rate for bank properties sold in Q1 compressed by 50 bps compared to Q4 while average lease term increased by just 3 years. Casual dining companies that were able to adapt to a fast-casual dining models have had the best success. Long term leases will garner the lowest cap rates in the sector according to Blankstein. Typical factors include: In short, anything that raises the risk profile of a property drives cap rates higher, which means that the current market value declines. Cap rates tend to move in conjunction with the 10-year treasury suggesting that additional increases are on the horizon, especially for riskier assets. The average lease rate for all ground leases in our database in 2022 is just under $1,300/mo. Lessees want the right to obtain a leasehold mortgage without the lenders consent. In a ground lease (GL), a tenant develops a piece of land during the lease period. 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. For example, if the lessee takes a 30-year mortgage on its improvements, the lease term will run for at least 35 to 40 years. As can be expected, sectors classified as essential business with more capabilities to adapt to a changing marketplace have been less affected than others. As the pressures from the Omicron variant persists, more consumers are purchasing goods rather than services. This is difficult in an unsubordinated ground lease because the lessor has first priority in the case of default. 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. hbbd```b``a Dr\1 LjI#xXW2=@Oq>"&xHTz/? All of these leases provide benefits and drawbacks to the lessor and lessee. Ive worked with this company for decades. Having them on our team meant that we could always receive truthful, timely and accurate answers to our questions. They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. Importantly, the tenant is responsible for paying all property taxes during the lease period. Market activity greatly surpassed expectations in fourth quarter 2020 as investors rushed to close deals before year-end. Average cap rates have stayed historically consistent in the mid 6% range, and recorded at 6.65% in Q1. endstream endobj 58 0 obj <>>> endobj 59 0 obj <. In just the last year, weve seen a 14-basis point decrease, and rates have been below the 6.0 percent mark for six consecutive quarters. This resulted in a record-setting quarter, where more than $12.5 billion in sales were reported. Further, QSRs typically offer a lower price point and a higher percentage of absolute NNN lease types for investors compared to other sectors. Casual dining companies that were able to adapt to a fast-casual dining model have been able to have the best success. This will allow you to earn income and possibly capital gains. The impact of COVID-19 has forever changed most restaurant business functions. 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. 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. With growing inflation and expected hikes in US Treasuries in 2022, NNN retail across virtually all asset types saw a compression in cap rates. There is a direct relationship between a net leased propertys value and its cap rate. In the first quarter national asking cap rates in the single tenant bank ground lease sector decreased to 5.35%, according to the 2021 Net Lease Bank Ground Lease Report. 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. Tenants with less financial strength push cap rates higher because they present more credit risk. The average cap rate remained flat decreasing by just 3 bps from Q3 while the average lease remained at 11 years in Q4. Do you own land, perhaps with dilapidated property on it? 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. The key difference between the two is who is responsible for payment of the propertys operating expenses. 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. Accordingly, as banks implement their modern footprints and mobile banking strategies, bank branch closings have become more common. In comparison to the economic depths experience in the spring 2020, the auto industry rebounded in new-vehicle sales. The industry has shown resilience by successful technology improvements that benefit both bank businesses and clients. 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. Also, because of COVID and the need to reposition assets, ground leases provide additional flexibility and financing options. For example, when the lease expires, what will happen to the improvements? Ronny did and performed exactly as he said he would. 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. Give them a call if the deal makes sense they can get it funded. It does the rest. If cap rates continue to rise through 2022, there are a number of important implications that investors should consider: While cap rate movements will have an impact on net leased properties in 2022, it is important to note that the largest real estate profits are made over the long term. Model currently only allows for an interest-only loan a structure already on it you to earn income possibly! Where once again ronny and team exceeded our expectations and our timeline do. Reliable ; it may not include confidential and/or proprietary information of the property improvements to the lease. Retailers should see notable gains, forecasting 6.2 % growth in core retail sales through 2021 lease pay... 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