arrow-with-man Image by Shutterstock

|

While net lease is one of the most durable segments incommercial real estate, the coronavirus pandemic thwartedfirst-quarter sales, according to Avison Young's Q1 2020 Cap RateReport.

|

The net lease sector's sales activity fell from 586 deals in Q42019 to 416 in Q1 2020. Despite that decline, cap rates droppedseven basis points 6.58% to 6.51%. That may be partiallyattributable to the average lease term increasing from 10.5 yearsto 11.6 years.

|

"This finding suggests that depressed volume is caused not by alack of investor confidence in the sector, but rather bycoronavirus-related obstacles to transacting efficiently," AvisonYoung noted in the report. "Unavailability of debt, inability toinspect properties and difficulty negotiating in a fully remotework environment are chief among these obstacles."

|

Richard T. Murphy, senior vice president, US capital markets netlease group at Avison Young, says cap rates have remained steadybecause the impact of COVID-19 hadn't fully tricked through the netlease market in Q1.

|

"However, many deals that were slated to close at the end of thequarter either got delayed or maybe didn't close at all," Murphysays. "So, we saw a decrease in the total number of deals."

|

In the report, Avison Young took a deeper look at varioussectors within net lease. Casual dining saw a 21-bps declinequarter to quarter, which may be attributable to the average leaseterm jumping from 11.9 years to 14.2. On deals with ten years ormore remaining on the lease term, cap rates increased from 6.06% to6.19%.

|

Though quick service restaurants (QSR) had the largest dealvolume of any sector, the number of trades dropped from 163 to 123and cap rates fell from 5.74% to 5.57%, despite average lease termsremaining roughly the same. Avison Young speculated that eventhough QSRS are restricted to delivery and drive through, investorsdraw confidence from corporate credit.

|

Even though QSR's are open, operating and done well compared toother retailers, there are some concerns going forward.

|

"Those quick-service restaurant concepts operate on very thinmargins," Murphy says. "So you have a very small drop in sales, andit can significantly hurt their bottom line. Even if someone isdoing 70% or 80% of the sales they were doing, their profits mayhave been wiped out. While the quick-service operators are a lotmore durable than the casual dining sector. But even they are notas durable as groceries, pharmacies, the dollar stores andconvenience stores."

|

Dollar stores, which have also been a staple throughout theCOVID-19 shutdowns, saw cap rates from 7.07% to 6.94%. Still, theirnumber of deals dropped from 113 to 64 in Q1.

|

Yet another stalwart throughout the pandemic, pharmacies, saw anine bps increase in the average cap rates. However, pharmacies,with more than ten years remaining on their lease, saw cap ratesjump from 5.82% to 6.65%. Overall transactions fell from 69 to 43in the sector.

|

Cap rates for convenience stores dropped 94.8 bps, which AvisonYoung said was a result that almost all of the sales were7-Elevens. Usually, 7-Elevens sales represent half of theconvenience store volume.

|

Despite the decline in sales, convenience stores, pharmacies,dollar stores, and QSRs are in better shape than other sectors,such as gyms and casual dining. "Anything open right now issomething that is going to survive and perhaps thrive," Murphysays. "Anything closed right now, um, is, you know, is going to be,it's going to be hurting.

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Leslie Shaver

Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.