Property Investors Increasingly Prefer the Flavor of Fast-Casual Restaurants
Sit-down, full-service restaurant chains continue to face pressure from fast-casual competitors, and not just in the competition to woo diners.
Investors also appear to be losing some of their appetite for real estate leased to the national “casual dining” chains such as Hooters, Outback Steakhouse, Red Lobster, Chili’s and Texas Roadhouse.
Cap rates, the annual yield for the real estate, jumped up in the first quarter for so-called “net lease” properties tied to casual dining restaurants.
According to a report from Wilmette, Illinois-based real estate firm The Boulder Group, “cap rates in the net lease casual dining sector increased to 6.32%” in the first quarter, up from 6.05% a year ago. The firm noted that the rate of increase was wider than other types of net lease investment properties.
Net lease properties involve leases in which the landlord has little to no responsibility for managing the real estate beyond collecting a rent check. An increasing cap rate can reflect the greater risk that a tenant might struggle or fail to renew at the end of its lease. The length of the term left on a lease is one of several factors used in determining the cap rate. The more years left on a lease tends to attract better prices for the property and lowers cap rates.
Many investors looking for lower risk have targeted fast-casual properties, or restaurants that typically do not offer table service. Earlier this month, the dirt underneath a Portillo’s in Normal, Illinois, sold for $4.4 million and is expected to produce an annual yield of 5% for the private investor.
Nearly 900 miles away in Panama City, Florida, another private investor has opted to buy the ground lease for a property that is home to a Panera Bread. It is under contract for the full-asking price $2.88 million, and with the same yield, Bryan Belk, senior director for retail investment sales for real estate firm FranklinStreet, confirmed.
“We sold it within two weeks of putting it on the market,” Belk said.
The shift in demand is reflected in the availability of properties. The number of casual dining restaurants for sale rose more than 30% above last year, according to The Boulder Group.
The surge in supply comes as some restaurant chains look to become more “asset light” by selling properties they can lease back from the buyer.
Some institutional investors, meanwhile, have been shedding casual dining restaurants as the sector sees sales shifting to fast-casual places.
The Boulder Group reported that investors have taken note of struggles by big names such as Applebee’s and Red Lobster. Applebee's second-largest franchisee filed for bankruptcy protection last year. The brand’s parent, Glendale, California-based Dine Brands Global, bought 69 of the franchisee’s stores in December to settle issues.
Red Lobster is another that has made investors wary, particularly among some real estate investment trusts: “Red Lobster is a brand that institutions have been selling to decrease exposure to the tenant,” said Randy Blankstein, president of The Boulder Group.
The seafood chain saw the biggest bump in cap rates among corporate-backed leases in the first quarter. The Boulder Group’s report showed an increase from 5.85% in the first quarter of last year to 6.15% this year. Recent sales have even been higher.
Phoenix-based VEREIT, an institutional investor, sold a Red Lobster in Elkhart, Indiana, in April for just under $3.2 million with a 6.25% cap rate. In the same month, the REIT sold another in Cartersville, Georgia, for $3.2 million with the same yield. It sat on the market for seven months.
The buyers of such properties are typically investors willing to accept more risk in hopes of a higher reward.
