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. I don't think 39 is a magic number. This resulted in a record-setting quarter, where more than $12.5 billion in sales were reported. Casual dining restaurants have pivoted to a new business model normalcy. $^A`Y` `vX\L*#A&4DX "eUu1$c` ^(I l This gives the GL a maximum term of 30 years. Figure 1 shows the degree to which multifamily and industrial yields dominate the lower end of the pricing curve. At the time of financing, it was extremely difficult to obtain bank financing for commercial real estate. who want exposure to commercial real estate assets, but not the hassle of managing them on a day to day basis. The biggest driver of the lease term is the financing that the lessee arranges. Retail trade sales recorded an increase of 26.9% YOY while motor vehicle and parts were up 71.1%. In a net lease, the tenant is responsible for some or all of them, depending on which type of net lease they have signed. If you are an accredited investor and would like to learn more about our current investment opportunities, click here. Despite the lack of inventory, consumer demand has remained strong. Some ground leases extend as far as 99 years. 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. Overall, they provided my team with a fantastic and highly professional service! 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. 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. Use by a firm's other offices requires multiple individual site licenses or a corporate multi-site license. Given the medical industry has been deemed as one of the most important sectors due to the correlation impact of COVID-19, single tenant net leased medical properties saw a slight compression in average cap rates, recording at 6.78% in Q1. Thank you to Assets America for your highly professional service! The impact of COVID-19 has forever changed most restaurant business functions. Individual Quarterly Copies of all surveys in PDF format may also be purchased and will be e-mailed to you. The company is very capable, I would recommend Assets America to any company requiring commercial financing. Source: Stan Johnson Co. Research, Real Capital Analytics. The cap rate formula is: Cap Rate = Net Operating Income / Market Value. 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. Beyond the arrangements for paying rent, a ground lease has several unique features. 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. to a ground lease needs to be refinanced with only 20 years remaining on the ground lease, the expected valuation decline can make this exceptionally difficult. Cap rates for net lease office remained unchanged at 6.80%. Inflation closed out the year at 6.8%, the highest seen since 1982. As can be expected, sectors classified as essential business with more capabilities to adapt to a changing marketplace have been less affected than others. Would refer them to all our business associates. 2023 Commercial Property Executive. They helped and successfully guided us to beat out 9 other competing offers! Cap Rates for Single Tenant Net Lease Bank Properties Compress; 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 diligent and forthright on both accounts and brought our deal to a successful closing. This additional aid to funds is expected to boost economic growth and push up both inflation and interest rates. 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. The Boulder Group announced the release of its Net Lease Bank Properties Ground Lease Report today. : A high quality tenant like a national company with a strong credit rating comes with less credit risk, which pushes the cap rate lower. 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. matthew.mousavi@srsre.com, 949.698.1115 You enter the area, rental rate, and agents fee. Since the pandemic, we have not seen a quarter with more than 10 trades in this asset type. However, short term leases with strong underlying real estate fundamentals will be in demand amongst certain investors who are willing to take on more risk through potential re-tenanting or redevelopment of a property., To view the full report: https://bouldergroup.com/media/pdf/Net-Lease-Bank-Ground-Lease-Report.pdf. There are four: , the tenant pays base rent plus their share of property taxes. which we must have to create or renew your subscription. Ronny is fantastic. 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 lessor might have the right to consent in any new purpose for the property. It was a rather unusual ground lease, in that it was a 10-year triple-net ground lease with four 5-year options to extend. While supply dwindled (22 sales in Q4 compared to 8 in Q1), cap rates for this sector held steady through Q1. UNITED STATES HQ8144 Walnut Hill Lane, Suite 1200Dallas, TX 75231. 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 . 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. 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. Since the pandemic, we havent seen a quarter with more than 10 trades in this asset type. : 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 the first quarter national asking cap rates in the single tenant bank ground lease sector increased to 5.47%, according to the Q12020 Net Lease Bank Report This represented a 17 basis. 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. 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. However, one remedy is a clause that requires the successor lessee to use the lender to finance the new GL. In this day and age, its especially rare and wonderful to work with a person who actually does what he says he will do. A low cap rate means higher value and a high cap rate means lower value. Normally, the lessee will want a term that is 5 to 10 years longer than the loan amortization schedule. The lender controls insurance proceeds stemming from casualty and condemnation. In return, the landlord asks for higher rent on the property. The big box sector within net lease continues to see diminished activity due to the pressure of online consumer spending and evolving square footage and business restructure. Even as the market emerges from the pandemic, and consumers may depend slightly less on e-commerce in the near term, the outlook still points to a long-term reliance on industrial product, and investors will continue to be drawn to opportunities in this sector. patrick.luther@srsre.com, 954.302.7365 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. The average cap rate for these assets compressed to 5.61% in Q4. A key arrangement is whether the landlord will agree to subordinate his priority on claims if the lessee defaults on its debt. 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. Choose your exact check-in and check-out dates for our monthly apartments for rent, while avoiding being locked into an annual contract. This sector is largely dominated by Walgreens transactions, and we expect to see the same over the coming months. pendik walking tour street coastal road marina ctiy tour ido expeditions seaside marina bazaar sea view cafes restaurants fast foodpendik yry caddesi sa. The also include absolute leases, percentage leases, and the subject of this article, ground leases. Ronny at Assets America has been invaluable to us and definitely is tops in his field. Banks continue to be in high demand for investors given the strong credit of the tenants. 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. Average cap rates have stayed historically consistent in the mid 6% range while recording at 6.34% in Q4. Holiday spending helped sentiment rebound up to 70.6, though still a much lower figure than pre-pandemic studies. As pharmacy stores are being looked at as another shopping alternative for consumers and pharmacists roles have changed given their accessibility to the public as health care professions, it is expected cap rates will remain relatively flat or slightly compressed through 2021. 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. Banks continue to be a focus for investors given the strong credit of the tenants. 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. Over the last few years, investors have been gravitating toward industrial product for several reasons. 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. 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. 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. 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. We leverage this experience to identify and present the most promising deals to our investors. Ronny did and performed exactly as he said he would. Pricing and overall investment demand for casual dining has increased as investors have seen the success of the changes in this industry. Highly recommend them to anyone looking for financing. The average lease rate for all ground leases in our database in 2022 is just under $1,300/mo. Investor Survey. Alternatively, an unsubordinated ground lease maintains the landlords top priority claims if the leaseholder defaults on his payments. At year-end 2021, the single-tenant industrial sector shattered records for both quarterly and annual investment sales volume. 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 Bank institutions that made strategic technology investments prior to COVID-19 have performed stronger. This is difficult in an unsubordinated ground lease because the lessor has first priority in the case of default. All of these leases provide benefits and drawbacks to the lessor and lessee. Commercial real estate investment property leases can be grouped into two categories, gross and net. 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. "Low interest rates and substantial amounts of investment capital chasing stable yields created an active net lease market. Average rates have inched back up a few basis points and now sit at 6.0 percent, but they arent expected to see much volatility for the remainder of the year. 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 info@fnrpusa.com for more information. This sector is expected to see secure, positive activity through 2021. Will a Recession Lower Your Property Taxes? The University of Michigans consumer sentiment for the US recorded at 83.0 in March 2021. Cap rates inflated by 32bps from 6.35% in Q4 to 6.67% in Q1. There is evidence that cap rates have expanded further since then. We later used Assets America for a unique equipment financing deal where once again Ronny and team exceeded our expectations and our timeline. 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%. Ronny found us several commercial properties which met our desired needs. In order to understand net lease trends, it is first necessary to understand what net leases are. 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. 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. Low cap rates mean less risk, which is why investors are satisfied with a lower return. 156 0 obj <>stream Unsurprisingly, lenders want the insurance proceeds to go toward the loan, not property restoration. More likely, well see industrial cap rates fluctuate in the current range as the highest-quality assets continue to trade through the end of the year and into 2022. According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report, cap rates in the single tenant net lease sector rose slightly. 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%. matthew.mousavi@srsre.com, 949.698.1115 As we look ahead, the trajectory of the pandemic and vaccine rollout will undoubtedly shape the 2021 economic landscape. We were thankful for how promptly and consistently they kept us informed and up to date on each step of our journey. 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 demand on the educational sector has been changing and evolving due to the continued effects of the pandemic. Ronny was a pleasure to work with and is extremely knowledgeable. Starbucks concept is to sell decommissioned shipping containers as an environmentally friendly alternative to conventional construction. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission. This requires special endorsements to the regular owners policy. Since the beginning of the pandemic, average cap rates have slipped into the high 5.0 percent range and at mid-year 2021, sat at 5.9 percent. The demand on the educational sector has been changing and evolving due to the impact of COVID-19. In fourth quarter, activity reached $18.3 billion, representing a 37 percent jump from the previous quarter and a 38 percent increase from fourth quarter 2020. The result of the calculation is a percentage that provides investors with the propertys annual rate of return if it is purchased with cash. Cap rates in Q1 compressed 3bps compared to Q4. Furthermore, the lessee must make a reasonable return on its investment after paying all costs. If you prefer, you may also subscribe or order offline via US Post. 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. Upon foreclosure of the property, the lender receives the lessees leasehold interest in the property. 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. Fast turn around. Annual Interest Rate - The annual rate to be paid on the mortgage. Of the four net lease types described above, single tenant properties with triple net leases are particularly popular with individual investors who want exposure to commercial real estate assets, but not the hassle of managing them on a day to day basis. Importantly, the tenant is responsible for paying all property taxes during the lease period. Cap Rates in 4Q21. In a ground lease (GL), a tenant develops a piece of land during the lease period. Will Cap Rates Continue to Increase in 2022? 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. Typically, a ground lease lasts from 35 to 99 years. This sector consists largely of credit-worthy brands like Panera Bread and Chipotle. The key difference between the two is who is responsible for payment of the propertys operating expenses. They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. With growing inflation and expected hikes in US Treasuries in 2022, NNN retail across virtually all asset types saw a compression in cap rates. A ground lease is more complicated than regular commercial leases. Are Grocery Stores and Supermarkets Good Investments? 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. Cap Rate: Understanding Credit Ratings * Surveys are usually published within 45 days after the close of the quarter. The 10-year Treasury rate is expected to rise to at least 2% by the end of this year. 2021 Net Lease Industrial Sales and Cap Rates. The cap rate compression associated with the banking sector can be best attributed to the investment grade credit of the tenants and the low interest rate environment says Randy Blankstein, President, The Boulder Group. 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. 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 Boulder Group is a boutique, Chicago-based investment real estate services firm specializing in transaction and advisory services for single tenant net lease properties. 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