Research Report

Cap Rate Report Q4 2016

2016 ended with rising interest rates following the presidential election. Cap rates followed a similar trend with an increase of 18 bps for Q4. This was the first increase in single tenant net lease (STNL) since Q4 2015.
This increase is largely attributed to the fact that cap rates toward the end of 2016 began to catch up with the upward trending interest rates. As we head into 2017, we expect investor demand to remain strong.

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 6.49% 4.00% 8.80%  10.7  25 6.68% 4.26% 9.00%  10.2  33 19.5  (0.5)
 Bank 5.53% 3.94% 8.09%  7.9  16 5.64% 4.36% 7.93%  10.5  15 11.8  2.6
 Big-Box 6.24% 4.13% 7.40%  9.7  8 7.08% 4.85% 9.14%  9.8  13 83.3  0.2
 Casual Dining 5.97% 4.50% 8.70%  12.9  27 6.18% 4.10% 12.00%  13.7  36 21.2  0.8
 C-Store 5.11% 3.56% 7.57%  13.6  19 6.14% 4.50% 9.17%  12.1  16 102.5  (1.4)
 Dollar Store 7.03% 5.62% 10.00%  11.7  48 7.10% 5.50% 10.04%  10.9  51 7.4  (0.9)
 Educational 8.00% 5.50% 10.15%  14.0  4 6.89% 6.47% 7.70%  7.8  3 -110.5  (6.2)
 Medical 6.10% 5.75% 6.51%  13.0  3 6.57% 5.58% 7.94%  12.4  4 46.7  (0.6)
 Pharmacy 6.20% 4.67% 7.99%  13.9  37 5.95% 4.62% 10.02%  16.0  36 -24.3  2.1
 QSR 5.65% 3.73% 11.86%  13.2  88 5.85% 3.28% 11.01%  12.9  84 20.6  (0.3)
 Other Retail1 6.44% 4.02% 8.70%  11.6  34 6.62% 4.74% 8.73%  11.9  24 18.2  0.3
Average 6.25%      12   6.43%      12   17.9  (0.4)
Total Sample Size          309          315  
1 Other retail includes retailers who don’t otherwise neatly fit into one of the above categories such as grocery stores, cellular stores, mattress stores, and fitness centers.

Key Takeaways

  • The C-Store sector experienced a cap rate expansion of 102.5 bps, this substantial increase was a result of many short-term deals with less than 10 years remaining. Many NNN leased C-Stores trading in Q4 did not have a high investment grade credit causing an overall cap rate increase for the sector.
  • The Educational sector saw a cap rate compression of 110.5 bps. Very few deals closed in Q4 and those sales that did close were in premium markets. 
  • The Big-Box sector showed an increase of 83.3 bps. This is mainly the result of several non-credit deals in tertiary locations.
  • The Medical sector showed no net average increase or decrease in the number of years remaining, however, one sale significantly skewed the average. As a result, the majority of the 47bps increase in cap rates was in fact due to older locations selling.
  • Generally, bank sales are ground leases, however, this quarter only 26% of bank sales were ground leases. Most deals closed were fee simple transactions which resulted in a slight increase of 11.8 bps, while the average lease years remaining went up by 2.6 years.
  • The average cap rates for Dollar Store, Pharmacy, QSR, and Casual Dining sectors remained relatively consistent this quarter with a movement of fewer than 25 bps.

Dollar Store

NATIONAL AVERAGE CAP RATES BY DOLLAR STORE

  • Quarter 3
  • Quarter 4

The Dollar Store Sector remained stable this quarter with a slight 7.4 bps increase. The Family Dollar average national cap rate increased by 9 bps, not a notable increase. However, 42% of stores closed were short-term deals with less than 10 years remaining. Dollar General, which makes up 60% of the dollar store sector, showed a minor increase of 10 bps.

Pharmacy

NATIONAL AVERAGE CAP RATES BY PHARMACY

  • Quarter 3
  • Quarter 4

This quarter there were no Rite Aid closings, a result of the pending merger between Walgreens and Rite Aid slated to be approved later this year 2017.

The Pharmacy sector as a whole showed a decrease of 24.3 bps since the last quarter. A majority of these deals were long term new stores which is why the average lease years remaining increased by 2.1 years. Walgreens made up 75% of the Pharmacy sector this quarter with a decrease in the average cap rate of 38 bps. 18% of Walgreens stores were in Florida, where cap rates usually trade lower than anywhere else in the nation, excluding California. Most of these were long-term deals where 62% of stores had 15+ years remaining on their lease.

CVS, which made up 25% of the pharmacy sample set, showed an average cap rate increase of 28 bps this quarter. 44% of stores closed were short-term deals with fewer than 10 years remaining.

STNL Tenant Change in Average Cap Rate

QUARTER OVER QUARTER

Tenant Q3 2016 Average Cap Rates Q4 2016 Average Cap Rates Change in Average Cap Rates (BPS)
Burger King 5.63% 5.79% 16.8
Starbucks 4.60% 5.19% 59.0
Arby’s 6.30% 6.30% 0.5
KFC 5.97% 5.40% -57.0
Wawa 4.54% 4.53% -1.2
Applebee’s 5.19% 5.44% 25.0
McDonald’s 4.15% 3.81% -33.7
Taco Bell 4.59% 5.24% 65.3
Wendy’s 5.95% 6.22% 27.3
All calculations are based upon available comps for each specific quarter with 10+ lease term remaining. The total number of sale comps for respective tenants in each quarter also varies significantly.
  • Taco Bell had an increase in average cap rates since many older stores with short-term leases traded this quarter.
  • Starbucks also showed an increase in cap rates since a majority of stores that closed were NN deals, holding the landlord responsible for some property expenses, resulting in a premium on cap rates.
  • KFC showed a decrease in cap rates because 80% of the stores closed had longer than 10 years remaining.
  • McDonald’s cap rate decreased due to ground lease store closing in California that trade at a lower cap rate than rest of the country.
  • Sales comps for Wendy’s include a significant number of franchisee stores, resulting in an increase in cap rates.

STNL Cap Rates vs 10 Year Treasury Rates

  • STNL Cap Rates
  • 10 Year Treasury Rates
  • Spread

During Q4, the 10-year treasury rate increased by 82 bps. A significant increase from 1.63% in the beginning of the quarter and ending at 2.45% by year end.  STNL cap rates continue to trend with interest rate movements and experienced a small increase of 18 bps. We also noticed the spread narrowing by 65 bps since last quarter. It’s too soon to tell, but this may simply be a lag in the market to reflect higher interest rates with correspondingly higher cap rates.

We expect the cap rates to follow an upward trend if the 10-year continues to increase with an expanding economy.  We believe any increase in interest rates will be nominal over the next few months.


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AmyCap Rate Report Q4 2016

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