Research Report

Cap Rate Report Q3 2016

The third quarter of 2016 saw cap rates follow a similar pattern from the beginning of the year. There has been a gradual decrease of 7.5 bps drop from the last quarter and a 20 bps drop year-to-date.  The low-interest rates and attractive cap rates have brought capital into commercial real estate, especially in net lease. Global economic and political uncertainties have attracted foreign investments into U.S. real estate, which is viewed as a safe haven.

The upcoming elections and a possible interest rate hike will be watched carefully in the commercial real estate sector. Any rapid increases in the interest rate may shrink the cap rate spread. Anticipated increases in the interest rates are considered to be minor with a nominal impact.

Q3 2016 Q4 2016 Change in:
Sectors Avg Cap Low High Avg Lease Term Sample Size Avg Cap Low High Avg Lease Term Sample Size Average Cap Rate  (bps) Lease Years Remaining
 Automotive  6.17% 4.25% 8.37% 12.3 25 6.49% 4.00% 8.80% 10.7 25 32.1 -1.6
 Bank  5.35% 4.00% 8.00% 11 20 5.53% 3.94% 8.09% 7.9 16 17.6 -3.1
 Big-Box  6.08% 4.73% 7.40% 13.2 8 6.24% 4.13% 7.40% 9.7 8 16.5 -3.5
 Casual Dining  6.04% 3.70% 9.40% 14 43 5.97% 4.50% 8.70% 12.9 27 -6.5 -1.1
 C-Store  5.70% 4.25% 8.37% 12.2 11 5.11% 3.56% 7.57% 13.6 19 -59.2 1.4
 Dollar Store  7.14% 5.60% 10.32% 11.5 49 7.03% 5.62% 10.00% 11.7 48 -11.5 0.2
 Educational  7.40% 5.90% 9.22% 10.7 8 8.00% 5.50% 10.15% 14 4 59.5 3.3
 Medical  6.89% 3.98% 10.00% 9.1 8 6.10% 5.75% 6.51% 13 3 -78.5 3.9
 Pharmacy  5.80% 4.44% 9.32% 17.3 26 6.20% 4.67% 7.99% 13.9 37 39.4 -3.4
 QSR  5.81% 3.63% 10.10% 13.1 82 5.65% 3.73% 11.86% 13.2 88 -16.6 0.1
 Other Retail1 7.20% 4.59% 12.00% 10.5 33 6.44% 4.02% 8.70% 11.6 34 -75.5 1.1
Average 6.32%     12   6.25%         -7.5 -0.25
Total Sample Size       313         309    
1 Other retail includes retailers who don’t otherwise neatly fit into one of the above categories.

Key Takeaways

  • The C-store sector experienced cap rate compression of 59 bps that was largely due to a number of newly built 7-Eleven closings with longer lease terms bringing the average lease years remaining to 13.6.  21% of the comps in the C-Store sector are in California where cap rates are trading at a lower yield than rest of the nation.
  • Automotive showed a slight increase of 32 bps; however, that was primarily due to older stores trading at a higher cap rate.
  • Other retail includes grocery stores, cellular stores, mattress stores, and fitness centers, which displayed a slight decrease in average cap rate. This was due in part to brand new stores opening in California and Florida.
  • The average cap rate for dollar stores, bank, big-box, QSR, and casual dining remained consistent this quarter.
  • The educational sector had a 59 bps increase in cap rate but fewer deals closed and most had less than 10 years remaining on the lease.
  • The pharmacy sector average cap rate increased by 39 bps and lease years remaining dropped
    by 3.42.

Dollar Store

NATIONAL AVERAGE CAP RATES BY DOLLAR STORE

  • Quarter 2
  • Quarter 3

Average cap rate in the dollar store sector dropped by 12 bps.  Family Dollar showed an increase of 20 bps, which was the result of many shorter NN lease sales.  Dollar General’s average cap rate however, decreased by 40 bps since the last quarter.  They make up more than twice the number of sales compared to Family Dollar and most of their stores were brand new build-to-suit deals with a 15-year absolute-triple-net lease.  Dollar General has plans to open 900 stores this year and 1,000 more in 2017.

Pharmacy

NATIONAL AVERAGE CAP RATES BY PHARMACY

  • Quarter 2
  • Quarter 3

The pharmacy sector as a whole showed an increase of 39 bps since the last quarter.  Both CVS which made up 44% of the pharmacy sample set and Walgreens, which made up 41%, showed an average cap rate increase by 46 bps and 58 bps respectively.  Rite Aid on the other hand which accounted for just 13% of the total pharmacy sector decreased by 68 bps since half of the stores traded were in California, which usually trades at a lower cap rate than anywhere else in the nation.

Overall we saw an increase in the total number of sales in the pharmacy sector. We believe this was largely attributable to some institutional owners reshuffling their portfolios and selling some of their holdings.

STNL Tenant Change in Average Cap Rate

QUARTER OVER QUARTER

TENANTS Q3 2016
AVERAGE  CAP RATES
Q4 2016
AVERAGE CAP RATES
CHANGE IN
AVERAGE CAP RATES (BPS)
7-Eleven 4.72% 4.43%  29.10
Advance Auto Parts 6.45% 7.60%  (115.20)
ALDI 6.01% 4.21%  180.00
Applebee’s 5.21% 5.12%  8.30
Arby’s 6.52% 6.59%  (7.50)
Aspen Dental 6.65% 6.04%  61.00
AutoZone 4.25% 5.42%  (117.40)
Bank of America 5.66% 5.72%  (5.90)
Bojangles’ 6.10% 6.22%  (11.80)
Burger King 6.24% 5.98%  25.10
Bush’s Chicken 6.75% 6.26%  49.00
Carl’s Jr 5.30% 4.95%  35.00
Chevron 4.78% 7.57%  (279.00)
Chick-fil-A 4.13% 4.21%  (8.80)
Christian Brothers Automotive 6.37% 6.20%  17.00
Circle K 7.53% 5.50%  202.70
Citibank 4.69% 4.61%  7.20
CVS 5.60% 6.06%  (46.70)
Del Taco 4.64% 4.75%  (11.50)
Denny’s 6.06% 5.73%  33.50
Dollar General 7.30% 6.90%  40.50
Dollar Tree 7.13% 7.40%  (27.50)
Family Dollar 6.96% 7.16%  (19.40)
Fastenal 9.49% 8.70%  78.50
Goodwill 6.77% 6.49%  28.50
Goodyear 6.43% 6.75%  (32.00)
Hardee’s 6.00% 5.83%  17.50
IHOP 5.87% 7.66%  (179.30)
Jiffy Lube 6.56% 7.07%  (51.40)
KFC 6.00% 6.08%  (7.60)
Mattress Firm 6.50% 6.64%  (13.80)
McDonald’s 4.10% 4.15%  (5.40)
O’Reilly Auto Parts 5.73% 4.14%  158.70
Panera Bread 5.13% 5.01%  11.50
Patient First 5.25% 5.75%  (50.00)
Pizza Hut 7.45% 7.00%  44.80
Red Lobster 5.82% 5.75%  6.80
Rite Aid 7.00% 6.44%  56.30
Ruby Tuesday 5.20% 5.50%  (30.00)
Sonic 5.75% 4.70%  105.00
Starbucks 5.11% 4.86%  24.90
Taco Bell 5.00% 4.59%  41.50
Tires Plus 7.88% 6.40%  148.00
Verizon 6.50% 6.26%  24.00
Verizon Wireless 5.75% 6.87%  (111.70)
Walgreens 5.62% 6.38%  (76.00)
Walmart Neighborhood Market 4.59% 5.05%  (46.00)
Wawa 4.80% 4.54%  26.30
Wells Fargo 6.80% 4.97%  183.30
Wendy’s 5.18% 5.92%  (74.00)

 

STNL Cap Rates vs 10 Year Treasury Rates

  • STNL Cap Rates
  • 10 Year Treasury Rates

Not surprisingly, STNL cap rates continue to trend with interest rate movements.  We see no significant widening or closing of spreads. The surprising result is perhaps that the interest rates have continued to decline despite being at an all-time lows for what is now “years.”  Between uncertainty in the upcoming elections and a wide belief that there will be no major shifts in monetary policy before the end of the year, we expect cap rates to continue along at these historic low rates.

In the absence of some external shock, it’s difficult to imagine a scenario, where interest rates, and therefore cap rates will rise precipitously in the coming quarter, or even into the first half of next year.


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Traci BidingerCap Rate Report Q3 2016

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