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Cap Rate Compression in the Drive-Thru Sector

From 2020 to 2022, cap rates have compressed throughout nearly all commercial investment types. Many factors have led to this compression, including rising inflation, a recent flight to hard assets, changes in the political landscape, re-opening of the economy and, of course, less supply coupled with increased demand overall. One investment type that has been especially pronounced is the retail quick service restaurant (QSR) segment. 

Throughout 2020 and the few years leading up to it, average closing cap rates for new Starbucks and Chipotle leases with 10 years of term were in the 5%-5.35% range. Within only 6-12 months, these compressed to 4.25%-4.75%, depending on lease type and location, for an overall drop of up to 75 basis points. Not only have cap rates compressed significantly for the asset type, NNN-leased QSR’s as a whole are difficult to find for many 1031 investors, compressing cap rates further even for the smallest of franchisees. What does this mean for buyers in continued competition for quality (and even lesser quality) QSR deals? Owners of these properties should evaluate their portfolios and consider divesting of any non-core assets they may have previously thought about selling to take advantage of record high pricing.
 
If you have questions about buying or selling on a national basis, you can reach out to Kyle Hartung, Vice President and Director of Investment Sales at Goodman Real Estate Services Group, LLC.
 
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May 24, 2022

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