There has been a refranchising wave across the major restaurant concepts, as franchisors are seeing value in relying on the franchisee community to grow their concepts, says Stark.

Part 2 of 2

SAN FRANCISCO-Most restaurant projects are targets of not only private investors, but also the public and private REITs. So says Justin Stark, associate director of the San Francisco office of Stan Johnson Co.

Stark recently chatted about the state of the restaurant net lease market in part one of this Q&A series, how it compares to three years ago, and what is driving investor interest and how quick service restaurants are most attractive to investors. See his thoughts below on investor competition, and what the future holds for investment activity in restaurants.

GlobeSt.com: What does the future hold for investment activity in restaurants? 

Stark: There will continue to be consistent deal flow in the restaurant space as corporations and franchisees continue to have aggressive growth plans throughout new and existing markets, which will lead to new ground leases being signed and new build to suits coming out of the ground. The franchisee continues to shoulder the majority of this growth, as there has been a re-franchising wave across the major restaurant concepts, as franchisors are seeing value in relying on the franchisee community to grow their concepts. As such we will continue to see an uptick in deal flow in the middle market franchisee space, which is subject to sale leaseback execution and traditional build to suit opportunities.

GlobeSt.com: How would you describe investor competition?

Stark: Significant. Most restaurant projects are targets of not only private investors, but also the public and private REITs. This combined demand paired with the current low cost of capital, has created significant competition resulting in multiple offer scenarios for one-off and portfolio opportunities. Public and Private REITS continue to raise large amounts of capital that needs to be deployed into deals which has also made them competitive, in some cases with private investors.

GlobeSt.com: How is that impacting pricing?

Stark: The investor competition for restaurant properties will continue to have an upward effect on pricing for single assets and portfolio opportunities in the near term. The 1031 community will continue to be the most competitive buyer pool for stabilized restaurant properties, although the pricing spread between the private and institutional investor has narrowed over the past 12 months which is due to the low cost of capital that REITS are able to achieve. This is most evident in the sale leaseback space as corporations and franchisees monetize real estate, the institutional buyer pool is now larger and better capitalized to compete for the those opportunities which has also driven up pricing for institutional assets.

GlobeSt.com: Where do you see the national retail market headed, and drilling down, how does San Francisco compare?

Stark: I think the market is in an interesting time right now with CAP rates perceived to be bottoming and 10-year treasuries starting inch up closer to 3.00%. The perceived increase in interest rates will likely bring CAP rates along with it at some point, although we just have not seen that yet for restaurant assets. The SF Bay Area continues to be one of the stronger markets in the country with continued educated employment growth and high barriers to entry. Most available net lease properties in the greater Bay Area continue to set national bench marks in terms of CAP rate compression and buyer demand. This is due to an influx of private net lease investors and 1031 buyers located in Northern California who are willing to pay a premium for assets close to home.