QSRs are e-commerce-resistant and historically less risky than other NNN assets like drug stores, or auto parts, which also are higher-priced NNN assets. Cap rates for NNN quick service restaurants (NNN QSRs) have been pushed to record lows recently by 1031 exchange investors who have aggressively shunned other asset classes for this. Average cap rates for assets leased to quick-service restaurants with 10-plus years of lease term remaining can range between 4.0-7.6%.
The QSR sector should fare well during a recession. Millennials are used to dining out, that won’t change during a downturn. Millenials may lower their price point but they are loyal to the restaurants that they frequent.
QSR investors where the average deal size is $2.0MM, are private, not institutional, 1031 buyers, who sell actively managed commercial real estate, like multifamily properties, and buy into NNN investments – classically considered passive. Most of the deals in the sector trade at cap rates of 5.0-6.0%, below institutional thresholds.
Investors intuitively understand NNN QSR concepts and are also drawn to the financial transparency, highly attractive long, NNN lease terms with built-in rent escalations. Tenants pay above-market rents, all of the above means increased ROI for investors.
Within the QSR sector, the financial backing of a lease can vary from a corporate guarantee from a large, institutional grade tenant like McDonald’s down to a franchisee with a single location. Accordingly, cap rates can vary a lot depending on the financial capacity of the tenant. In recent years, corporate-backed leases generated a 60 basis point overage over franchisee-backed lease guarantees. One of the main benefits to franchisee-backed leases is that they will often contain clauses that require the tenant to be more transparent about their sales performance, with the landlord.
Popular NNN QSR Brands
Dunkin’ Donuts, Starbucks, Burger King, and Popeyes, are the most popular QSR brands with NYC, Texas, Florida and California seeing the maximum number of trades.
New concepts includes outdoor digital menus, double drive-thrus, and mobile ordering technology. Older, more traditional NNN QSR concepts like McDonald’s, Wendy’s and Taco Bell are expanding internationally and newer concepts like Del Taco, In-N-Out Burger, Chick Fil A, Culver’s, Qdoba, Raising Cane, etc are expanding domestically. The trend setting millennial population eats fresher and healthier and so concepts that have changed their menu to include healthy and fresh-er foods, offering mobile delivery will do very well.
Restaurants using third-party delivery apps must balance concerns such as delivery speed and customer satisfaction with significant boosts in order volumes that such apps usually create. These restaurants must consider higher food and labor costs as well as an increasing number of regulations. Growing competition among third-party apps themselves can also affect customer retention: DoorDash, Grubhub and Uber Eats are all fighting for the same customer bases. These consumers are increasingly inclined to relate the quality of their delivery or dining experiences to these apps, too, making it crucial that restaurants partner with the right third-party platforms.
Online ordering and deliveries no longer represent a small segment of the restaurant experience, as 63 percent of all restaurant traffic now occurs off-premises. This means a growing number of consumers’ first experiences with restaurants are enabled through mobile apps.
Investors will gravitate to the QSR sector since it offers a lower investment price compared to NNN auto parts and dollar store leases. Compared to auto part and dollar stores, the NNN leases with QSR properties frequently have rental bumps annually or every 5 years.
When considering investing in NNN QSR leases, it isn’t as easy as calling a stock broker to buy stocks or mutual funds. NNN leases have nuance and complexity, and yet offer risk-adjusted returns that are unparalleled in the investment world. Contact your trusted experts at The Triple Net Investment Group to get solid advice on your next step with buying or selling a NNN lease, and get access to the best deals in the nation.