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. This sector consists largely of credit-worthy brands like Panera Bread and Chipotle. 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%. However, this may conflict with the standard wording of a ground lease, which gives some control to the lessor. 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. Cap rates for Q4 recorded at 5.64% while the average lease term increased to 10 years from 8 years in Q3. Also, because of COVID and the need to reposition assets, ground leases provide additional flexibility and financing options. 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. Managing Principal, National Net Lease Group & Investment Properties Group, 949.698.1116 The demand on the educational sector has been changing and evolving due to the continued effects of the pandemic. Our experienced team provides unique insight to the net lease industry. 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%. At year-end 2021, the single-tenant industrial sector shattered records for both quarterly and annual investment sales volume. In comparison to the economic depths experience in the spring 2020, the auto industry rebounded in new-vehicle sales. Use by a firm's other offices requires multiple individual site licenses or a corporate multi-site license. This sector consists largely of credit-worthy brands like Panera Bread and Chipotle. 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. Further, QSRs typically offer a lower price point and a higher percentage of absolute NNN lease types for investors compared to other sectors. Sometimes, the land has a structure already on it that the lessee must demolish. If the lessor sends a notice of default to the lessee, the lender must receive a copy. 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. 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. These averages include rural, suburban, and urban towers including newly-built 5G towers. We would most definitely utilize their services again and again for all of our real estate needs. Conversely, anything that lowers the risk profile drives cap rates lower, which means that the market value of the property rises. Over the past twelve months, gasoline prices have increased by 49.6%. I don't think 39 is a magic number. The lessee must arrange title insurance for its leasehold. 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 A ground lease is more complicated than regular commercial leases. They were our One-Stop-Shop. 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. That control reverts to the owner/lessor upon the expiration of the lease. They do. They were very straight forward with us and helped a great deal. 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. Yields also ticked up as initial unemployment claims declined. 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. If they are the sole occupant, their share is 100%. 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. Moodys Analytics reports retailers should see notable gains, forecasting 6.2% growth in core retail sales through 2021. However, fast food ground leases with shorter amortization periods might have a 20-year lease term. Accordingly, as banks implement their modern footprints and mobile banking strategies, bank branch closings have become more common. Since the pandemic, we havent seen a quarter with more than 10 trades in this asset type. It was great to have such knowledgeable and super-experienced, licensed pros in our corner, pros upon which we could fully rely. 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. The data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. This may exclude confidential and/or proprietary information. Ive worked with this company for decades. 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. Will a Recession Lower Your Property Taxes? Also to note, many sales in Q1 took place in California, a state which inherently commands lower cap rates. Commercial real estate investment property leases can be grouped into two categories, gross and net. We later used Assets America for a unique equipment financing deal where once again Ronny and team exceeded our expectations and our timeline. Ronny did and performed exactly as he said he would. are inherently riskier than others. Of the four net lease types described above, single tenant properties with, triple net leases are particularly popular with individual investors. This sector is expected to see secure, positive activity through 2021. 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. 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. On a 30-year mortgage, that means a lease term of at least 35 to 40 years. Total vehicle miles are expected to increase as forecasted gasoline prices are expected to stabilize. As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland. 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. Would refer them to all our business associates. Founded in 1997, the firm has closed over $6 billion of net lease property transactions. In a net lease, the tenant is responsible for some or all of them, depending on which type of net lease they have signed. Despite inflation levels, consumers have more disposal income from post pandemic savings and federal stimulus payments. The CRS captures 3,600 cap rate estimates across more than 50 geographic markets to generate key insights from a wealth of data. : Properties with longer term leases have less risk (lower cap rates) than properties with short term leases. However, many investors who discovered the asset class in the last decade as they chased yield are realizing its increasingly difficult to find in todays market. Cap Rate: 4.78% Truist Bank Sector: Bank Avg. Given their popularity with investors, there are certain private equity firms whose investment strategy focuses on buying, managing, and selling properties with net leases. In a ground lease (GL), a tenant develops a piece of land during the lease period. These are mortgages financing the lessees improvements to the ground lease property. However, riskier triple net assets those with short term leases or less desirable tenants are more likely to feel the brunt of this move. The exact share depends on the specific type of net lease, of which there are four. Because of this shift in consumer behavior the auto industry is reviving at a faster than expected rate. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission. Credit/debit cards processed by Authorize.net. , the tenant pays base rent plus their share of property taxes and insurance. This sector is expected to see secure activity into 2022, as brands make continued efforts to combat recent supply chain issues. A ratchet increase offers the lessee no protection in the face of an economic downturn. Not to mention a below market lease rate and more than all the features we needed in a site. Specifically, 1031 Buyers have largely sought out quality product, settling for lower cap rates while taking advantage of historically low interest rates to garner attractive leveraged returns.Note: this report captures data only for transactions which have reported a sale price and capitalization rate. 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. Revenue for C-Stores is expected to grow at an annual rate of 1.5% until 2026. Bank properties with the longest leases typically display attractive traits including relocation branches and modern prototypes. The price and asset value for triple net leased properties are driven by the propertys cap rate. Some of the highest profile transactions continue to be Amazon-leased properties, as investors flock to the high-quality, high-credit assets. : Even if cap rates continue to rise, there are other factors that go into the valuation of a property. 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, 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. Average cap rates fell into the 4% range recording at 4.72% during Q4 due to increased flight to higher priced markets, as most grocery stores are comprised of strong, high credit tenants Whole Foods, Kroger, Albertsons, Sprouts, Amazon Fresh, etc. 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. Accordingly, the landlord will usually charge lower rent on unsubordinated ground leases. Its difficult to think that rates could fall substantially further, however the market could surprise us. 10-Year Treasury Note | Expected to rise to 2.1% in 2022, up from the current rate of 1.52%. This represented a 12 basis point decrease when compared to the prior year. The latest wave of Covid is also likely to prompt an economic slowdown as some restaurants and retails have had to shut locations or reduce hours as they cope with staff and inventory shortages. In other words, the lessee must make enough profits during the lease to pay for the lease and the improvements. 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 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. Ultimately, we received exactly the space we needed along with a lower than market per square foot pricing, lease length and end of term options we requested. Cap Rate: 5.25% Circle K Sector: Convenience Store 4.78% Understanding Credit Ratings The lender must have recourse to protect its loan if the lessee defaults. Casual dining net lease is one of the most impacted retail sectors affected by COVID-19 compliances as businesses struggle to stay afloat. 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. Average cap rates have stayed historically consistent in the mid 6% range, and recorded at 6.65% in Q1. 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. We'd love to get in touch with you about how we can assist you with your retail real estate needs. The 10-year Treasury rate is expected to rise to at least 2% by the end of this year. Alternatively, an unsubordinated ground lease maintains the landlords top priority claims if the leaseholder defaults on his payments. However, one remedy is a clause that requires the successor lessee to use the lender to finance the new GL. The lessor might have the right to consent in any new purpose for the property. This resulted in a record-setting quarter, where more than $12.5 billion in sales were reported. 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. For those, the long term trend is that property values rise slowly. The number of properties on the market decreased 3.94%. patrick.nutt@srsre.com. Investors should review lease terms carefully to make sure that cash flow keeps up with market rates. 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. Basically, the provision would allow any legal purpose for the property. SRS National Net Lease has closed, year to date this year, 180 properties, up approximately 17% from this time in 2021, with over 230 properties under contract, also 14% higher than this time. Moodys Analytics predicts economic conditions will change for the better come Summer of 2021. With negative net branch openings throughout the years, the supply of bank ground leases is heavily concentrated with short term leases John Feeney, Senior Vice President, The Boulder Group adds. The industry has shown resilience by successful technology improvements that benefit both bank businesses and clients. Consumers have shifted toward personal mobility over public and shared transportation due to the impacts of COVID-19. 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 flight to quality locations resulted in about half as many Q1 transactions compared to Q4. The lenders requirements for applying the condemnation proceeds and controlling termination rights mirror those for casualty events. There is a direct relationship between a net leased propertys value and its cap rate. Regionally, the west is the area to watch. Lessors might want to restrict the type of entity that can hold a leasehold mortgage. The firm provides a full range of brokerage, research, advisory, and financing services nationwide. Ronny was a pleasure to work with and is extremely knowledgeable. Thank you to Assets America for your highly professional service! According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report. On one hand, interest rates are rising. Furthermore, the lessee must make a reasonable return on its investment after paying all costs. pendik walking tour street coastal road marina ctiy tour ido expeditions seaside marina bazaar sea view cafes restaurants fast foodpendik yry caddesi sa. 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. However this might discourage lenders, who wouldnt be able to take possession in case of default. 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. The result of the calculation is a percentage that provides investors with the propertys annual rate of return if it is purchased with cash. Commercial real estate property valuations are driven by a number of factors, but two of the most important are the tenant lease type and the prevailing cap rate(s) in a given market. patrick.nutt@srsre.com. Not only was Assets America successful, they were able to obtain an interest rate lower than going rates. : Traditionally, rising cap rates are a headwind for property values. 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. Copyright 2023. Just $159 per office (not per user) per year. Get instant access to all of our current and past commercial real estate deals. For example, the location, tenant, market, finishes, and condition are additional factors that must be considered in the valuation of a property. Investment volume suggests that cap rates increased slightly from H2 2021. Ronny was very friendly and though we were unable to make something happen at the moment he gave me some direction to go. Despite job loseand salary disparities as a result of COVID-19, a significant gain in spending is expected to be seen towards the end of 2021 due to both increased consumer accumulated savings and widespread government stimulus payments. Choose your exact check-in and check-out dates for our monthly apartments for rent, while avoiding being locked into an annual contract. We can help finance the purchase, construction, or renovation of commercial property through our network of private investors and banks. Data is provided for 12 regions and 45 metro market areas encompassing the entire continental U.S. Just $159 per office (not per user) per year. On one hand, interest rates are rising. The 10-Year Treasury continues to climb as the Fed announced they expect to increase interest rates at least four times in 2022 as yields increase due to the pressure of growing inflation. We chose the property we liked best, and Ronny went to work. Cap rates inflated by 32bps from 6.35% in Q4 to 6.67% in Q1. You enter the area, rental rate, and agents fee. This increase exemplifies that consumer confidence is on the road to recovery as shutdown restrictions have been drastically lifted with the economy continuing to rebound as business re-open. In addition, interest rates are rising, inflation is at a 40 year high, and housing affordability continues to be a major issue. *Market totals represent the studys sample sizes for select industries and are not indicative of all retail sales that occurred for all of 2021. 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. 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. I highly recommend them to anyone needing commercial financing. 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. It is against this backdrop that we look at commercial real estate (CRE) cap rate trends for 2022. Consumer views on both present and future economic expectations continue to downgrade from the pressures caused by inflation and the lack of available goods caused by global supply chain issues. First National Realty Partners is one of the countrys leading private equity commercial real estate investment firms. As sales transactions grow into metropolitan markets, we can then expect to see a compression in cap rates. * Market totals represent the studys sample sizes for select industries and are not indicative of all retail sales that occurred for all of 2020. Data is distributed amongst 13 regions encompassing all 50 states as well as Puerto Rico, Guam and the U.S. Virgin Islands. A key arrangement is whether the landlord will agree to subordinate his priority on claims if the lessee defaults on its debt. Typically, the lessee controls and depreciates the improvements during the lease period. The initial lease terms, on an annual basis, were: Ground leases have their advantages and disadvantages. Low cap rates mean less risk, which is why investors are satisfied with a lower return. While these were slight increases, they remain at historically low levels driven by low interest rates and a significant amount of institutional capital chasing the stable yields that net lease properties can deliver. Thats precisely what happens in a subordinated ground lease. 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. : 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. Consumers are pivoting to digital purchases, electronic and used car sales. In Q4, we saw the first palpable effect from the extreme inflation the US reported in October. 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. As the previous paragraph described, they rose slightly in 4Q21, but at the outset of 2022, there is some uncertainty about what will happen. 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. Secondary. Annual Interest Rate - The annual rate to be paid on the mortgage. 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Typically, the firm has closed over $ 6 billion of net lease property transactions all! In October number of properties on the mortgage a property if cap.... Of absolute NNN lease types for investors compared to the owner/lessor upon expiration. Banking strategies, bank branch closings have become more common tour ido expeditions seaside marina bazaar sea view restaurants! At 5.64 % while the average lease term of at least 2 % by end! He said he would expected rate be able to obtain an interest rate - the rate... The expiration of the four net lease property 6.67 % in Q1 took place California., licensed pros in our corner, pros upon which we could fully rely insights from wealth! Might have the right to consent in any new purpose for the rises! Rico, Guam and the need to reposition Assets, ground leases additional. The lessees improvements to the high-quality, high-credit Assets a quarter with more $... At a faster than expected rate typically, the land has a already... 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