Research Report

Q4 2017 Cap Rate Report

The average cap rates from Q3 to Q4 expanded by 6-bps. The rise in cap rates was helped by fewer ground leases and a high proportion of double net leases trading during Q4. Raising interest rates are expected to put upward pressure on cap rates in the future.

1Other 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.

DISCLOSURES: As part of our market research, we collect sales price, cap rate, and lease years remaining for all publicly advertised and sold STNL properties.
a) We are not able to capture 100% of the off-market transactions that occur; however, the nature of off-market transactions typically limits their value as true market comps.
b) Sources include public records, sales announcements, Calkain sales, and appraiser obtained sales amongst others.
c) Our collection process, while thorough, is not all-encompassing and there may be biases in the data as it relates to geography, tenancy, or brokers involved in the transaction.
d) Public records often lag behind when transactions actually close, months in some cases. Consequently, the data supplied here for any given quarter is likely to miss a material amount of transactions that actually closed in it.
e) In sectors with a skew of greater than |2|, we have replaced the mean with the median to better describe these sectors.

Key Takeaways

  • The banking sector saw cap rates grow by 37-bps as the number of lease years remaining fell by 0.8 years. As the term remaining decreases, we expect cap rates to increase.
  • The big-box sector has seen an increase in cap rates. This is reflective of the continued rise of online competition affecting this sector. The rise in cap rates can also be attributed to fewer deals closing in premium markets such as California and Florida.
  • The casual dining sector saw a 2.6-year increase in the lease term remaining. This increase in lease length likely is the primary cause of a 46-bps decline in cap rates.
  • A higher cap rate and more lease years remaining can be attributed to a changing mix of C-Store tenants trading during Q4.
  • The rise in cap rates for the medical sector was caused by a significant fall in the number of lease years remaining.
  • The QSR sector saw a small cap rate compression of 14-bps while the average number of lease years remaining increased by 1.9 years. These were driven by more ground leases closing, which tends to have longer terms and lower cap rates. The average cap rates for NNN leases remained stable while ground leases saw a minor rise in cap rates.


Dollar Stores

The overall dollar store sector average decreased by 19-bps while the average term remaining increased by 0.7 years. This was in part due to the minor and negative movement in the average Dollar General cap rate. Family Dollar saw their cap rate slightly expand. An increase in the number of years remaining also aided in the overall compression of the sector’s cap rates.

The dollar store sector was remarkably flat when looking at comps with at least 10 lease years remaining. Family Dollar’s cap rate declined by 3-bps while Dollar General’s cap rate was almost unchanged at 6.64%.


The pharmacy sector saw cap rates fall by 15-bps while the average number of lease years remaining fell by 0.9 years. Q4 saw pharmacies close at a wide range of cap rates causing a skew of greater than two. To avoid painting a distorted picture of how pharmacies performed, the median cap rate was used to describe the sector instead of the mean.

Walgreens saw cap rates rise slightly, likely, as a reaction to the agreement to purchase over 1,900 pharmacies from Rite Aid. This agreement puts underperforming stores near a Rite Aid at an increased risk of closing. The uncertainty of a stores future also extends to many of the Rite Aid stores as investors wait to see which stores are part of the Walgreens deal.

CVS saw cap rates compress from Q3 to Q4. The average CVS pharmacy cap rate moved slightly, 14-bps, while the 10+ lease years remaining experienced a much greater compression. Q4 saw the average number of lease years remaining increase and the number of locations trading in premium markets increase. The differences in location from Q3 to Q4 was more pronounced in the 10+ years remaining group. The stability and growth of CVS is another factor leading to the increasing premium and compressing cap rate.

STNL Tenant Change in Average Cap Rates Quarter Over Quarter

  • The Advance Auto Parts cap rate experienced a significant compression due to the higher number of years remaining.
  • Q4 saw more new construction O’Reilly Auto Parts trade compared to Q3.
  • Circle K’s in Q4 tended to have more lease remaining but were sold in non-premium markets. This caused the average cap rate to increase by over 100-bps. A small sample size in Q3 also contributed to the magnitude of the change.
  • The 72-bps cap rate compression Bojangles’ experienced from Q3 to Q4 can be attributed to more locations with corporate guarantees trading during the 4th quarter. Again, a small sample contributed to the big swing.
  • Dunkin’ Donuts move in cap rate is due primarily to no properties trading in premium markets during Q4.
  • A west coast sale during Q4 helped pull down the average for Sonic.
  • Most of the Taco Bell sales occurred during Q4 in premium markets, causing the average to be much lower. The lower average number of lease years remaining helped offset some of the low cap rates due to markets.
  • Q3 saw Wendy’s locations selling for a premium in top locations, the cap rate rose to be more in line with an average Wendy’s cap rate.

*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.

STNL Cap Rates vs. 10-Year Treasury Rates

  • The Single Tenant Net Lease (STNL) average has remained near historic lows.
  • The spread between the STNL average and the 10-year treasury rate has remained under 4% for the fifth quarter in a row.
  • The Federal Reserve issued a rate hike during Q4. Higher rates are likely to push cap rates up in the future.
  • More rate hikes are expected in the future, these will put upward pressure on cap rates as they happen.


Traci BidingerQ4 2017 Cap Rate Report

Related Posts