The COVID-19 pandemic has changed how consumers live, work and dine out. Due to the virus, Americans have flocked to fast-food drive-throughs for inexpensive menu options with little contact.
Net lease investors have taken notice and demand for quick-service restaurants (QSR) is as high as for McDonald’s Big Macs or Popeyes’ chicken sandwiches.
As COVID-19 cases continue to spike nationally, some states have imposed new coronavirus-related restrictions, including limiting restaurant capacity or closing in-door dining altogether. This has accelerated the demand for QSRs, which are flourishing during the health crisis, due largely to drive-throughs.
Demand for QSRs continues to be quite strong, especially for assets with drive-throughs, agrees Lanie Beck, Director Of Corporate Research, Marketing & Communications at Stan Johnson Company, which specializes in net lease investments.
“Virtually, all concepts had to react quickly to a shifting environment back in March, which resulted in most QSRs closing their dining rooms completely, and instead, focusing on drive-through and carry-out volume,” Beck says. “Fast-forward a few months, and many brands, including Taco Bell, KFC and Burger King, are exploring new store concepts with double and triple drive-through lanes.”
These additional lanes are dedicated for mobile pick-ups, a trend that has accelerated due to the health crisis. Experts say drive-through and mobile ordering are here to stay post-pandemic.
“Other restaurants, like Shake Shack, that historically have been dine-in and carry out-only plan to incorporate drive-throughs into future builds,” Beck notes. “As these brands build new restaurants in 2021 and beyond, investors will have outstanding opportunities to acquire the latest concepts with long-term leases in place.”
Where are cap rates?
For the strongest credit tenants, it’s not uncommon to see individual properties transact at sub-4 percent cap rates, according to Stan Johnson Co. Research. (The company’s methodology includes single-tenant sale transactions for a rolling 12-month period and properties with 10-plus years of lease term remaining).
“We have six concepts, including Chick-fil-A, Starbucks and McDonald’s that have traded in the last 12 months with individual cap rates in the 3-percent range,” Beck says.
Last year at this time, five restaurant concepts had traded in the 3-percent range, so not that much has changed, she notes.
Stan Johnson has seen average cap rates for some tenants stay very flat year-over-year. For example, Hardee’s and Bojangles both have seen their rolling 12-month average cap rates hold steady at about 6 percent in the last year.
Cap rates on Popeyes restaurants have also stayed flat at about 5.9 percent, with Taco Bell at 5.4 percent, and Starbucks holding at around 4.8 percent, according to the firm’s data. Average cap rates for Dairy Queen-occupied properties have risen from 5.8 percent to 6.2 percent.
Average cap rates have also compressed across a few brands, including McDonald’s (from 4.5 percent to 4.0 percent), Chick-fil-A (4.3 percent to 4.0 percent), and Wendy’s (5.6 percent to 5.3 percent).