Research Report

Q1 2019 Cap Rate Report

New Year Brings a Fresh Perspective on Transactions in Q1

Q1 2019 Overview

A new year brings a fresh perspective on transactions. The end of the year was marked by stagnant cap rates, quarter over quarter, and a tendency toward caution about deals. This was attributable to many factors, both directly and indirectly tied to the market, ranging from interest-rate fluctuations to the impact of a government shutdown.

But the government is up and running again, the Fed has backed off of toying with interest rates (which now approach 2016 levels) and transactions are ticking up. The ongoing nature of the robust economy promises a continued long run, but recession or not, many investors are making hay while the sun shines and taking flight to quality and the sure, long-term returns of net lease.

If there is a check on optimism, it comes in deals greater than $5 million. Private investors especially seem to be wary about throwing all their resources at a single asset.

As always in the sector, well-positioned assets in gateway markets continue to trade at a premium. They offer high visibility, easy traffic access and long-term leases with creditworthy tenants, much to the liking of private, high net-worth individuals. The riskier plays–the higher cap-rate deals with short-term leases–are best left mostly to the institutions and real estate professionals who understand the value of the underlying real estate.

Overall, cap rates are down slightly, on average 6.4 basis points (bps). In a way, the Q1 cap rate story is one of extremes: The two largest sectors as determined by our sampl,e are Quick Service Restaurants (QSR) and Dollar Stores. These had only minor cap-rate movement (-1.7 and 17.7 bps respectively), while the two smallest sectors, Educational and Big Box, tracked among the largest (-91.2 and -58.3, respectively).

Sectors in Brief

Transactions in the Bank sector were marked by deals with shorter-term leases and a hike in average cap rates, by 23.3 bps. Fewer ground leases (GL) also contributed to the increase.

Q1 saw more Big-Box sales in premium markets (specifically, California and Florida) than in Q4. As stated, cap rates compressed by 58.3 bps–the second largest compression tracked for the quarter. (The Educational sector holds that record, at -91.2.) Big Boxes vacated by troubled brands are also offering redevelopment opportunities for other net lease tenants.

Much like Big Boxes, the Casual Dining sector saw sales increases in premium markets (specifically, California and Florida) and a resultant 31.6-bp compression in cap rates. Convenience Stores saw cap rates compress as well–by 26.1 bps, on deals with longer lease terms.

From the last quarter of 2018 to Q1 of this year, QSR deals switched from predominantly regional chains to more national. As noted above, cap rates in this sector showed the least movement, a compression of 1.7 bps.

Markets in Depth: Dollar Stores

Overall, the sector is up 17 bps while lease years remaining fell by roughly half a year. While Dollar General builds some 1000 stores, brokers are still trying to move last year’s inventory, so there’s an oversupply of that brand in the market. Its cap rate rose 22 bps to 7.38%.

We can also expect Family Dollar cap rates to increase with its announcement of store closings. In addition, they switched from a 15-year triple-net to a 10-year double net. In Q1, Family Dollar was up 11 bps to 7.81%.

Markets in Depth: Pharmacy

Pharmacy as a whole is up by 24.3 bps quarter over quarter. Completed deals tend to be older, which means shorter lease terms remaining, specifically, two fewer years. An increase in high-cap-rate Rite Aid deals also helped push that increase. Q1 was a quarter of subdued activity in the sector, especially with Walgreens and CVS. While pharmacies have great credit and active locations, they don’t seem to be providing the rent growth that high net-worth individuals want in order to keep up with inflation.

Brand-By-Brand: Average Cap Rate Changes

  • Arby’s: The average lease years went up and the cap rate went down–by 60.6 bps.
  • Bojangles’: There were an increased number of corporate deals in Q1, guaranteeing greater safety for investors. People paid low cap rates (6.13%, down by 20.3 bps) for that security.
  • Dunkin Donuts: On average much newer stores transacted in Q4 compared to Q1, on a premium. Q1’s 5.68% cap rate was up 20 bps over Q4.
  • IHOP: An increase in the number of lease years remaining led to lower cap rates, from 6.66% in Q4 to 6.03%.
  • KFC: Q4 saw multiple sales in premium markets, while Q1 had none, creating an artificial rise in cap rates (by 60 bps). Average lease years fell and no GLs closed in Q1 helping push the cap rate higher.
  • McDonald’s: More sales in premium locations in Q1 than in Q4 resulted in a 23.3-bp compression to 4.45%.
  • Starbucks: Newer buildings in premium locations drove the SBUX cap rate down from Q4 to Q1, where it stood at 4.99%.
  • Taco Bell: The net effect of more deals in premium locations and shorter terms remaining led to a moderate 21.4-point increase in rates, to 5.28%.
  • Wendy’s: A falling number of lease years remaining led to an increase in the average cap rate, from 5.32% (Q4) to 6.02%

STNL Cap Rates vs. 10 Year Treasury Rates

This is the third straight quarter in which we have seen the 10-year Treasury rate decrease, along with the spread increasing. In addition, it was a quarter of firsts:

    • The first time since the third quarter of 2016 with a spread over 4%.
    • The first time the STNL cap rate has decreased across two quarters since Q2 to Q3 2017.

Following news out of the Fed, it seems that the expectation is one rate hike in 2019 despite current inflation rates.


The net lease market is out of the tunnel of caution experienced in the last months of 2018. While no signs of a recession are discernible on the horizon, some investors are taking advantage of ultra-positive market and economic conditions while they can. Recession preparation or none, it’s a good time to be in net lease.

Leigh ClineQ1 2019 Cap Rate Report

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