It’s Back: Cap Rate Compression for Triple Net Leases

DOVER, DE-The recent trade of five ground-leased pad cites here provides an apt illustration of where cap rates are now in the Mid-Atlantic for triple net leased properties--and where they so recently were. Briefly, the five sites, whose sale was brokered by the Philadelphia-based Marcus & Millichap Real Estate Investment Services, were:

•  Applebee’s Neighborhood Bar & Grill, at 4110 S. DuPont Hwy., which traded at a 7% cap rate;

•  Chick-fil-A, at 4044 S. DuPont Hwy., at a 6.25% cap rate;

•  Dunkin’ Donuts, at 4080 S. DuPont Hwy., at a 6.24% cap rate;

•  Texas Roadhouse, at 4568 S. DuPont Hwy., at a 7.52% cap rate; and

•  WSFS Bank, at 4566 S. DuPont Hwy., at a 6.62% cap rate.

These properties were put on the market in early November, with the seller seeking to have them closed by year’s end, says Dean Zang, who, along with colleague Mark Taylor, brokered the deals. At that time, there was a lot of uncertainty as to whether a deal could be worked out in Washington, DC over the tax cuts, he tells GlobeSt.com. There also happened to be a lot of buyer activity at that time, he continues, with Treasury yields so low that more people were looking at alternative investments than usual.

But that was then. Subsequently, the lame duck Congress negotiated a deal with the White House and buyers have pulled their demand back slightly. In short, those deals that topped 7%--particularly the trade of the Texas Roadhouse here, which went for a 7.52% cap--are now history. “I would say that the best you can get now is between a 6.8% cap rate to, at most, 7%,” Zang says.

These deals are not even the best illustration of the heights some cap rates reached, he adds. “They were trading significantly higher in November, with some closing as high as 8%.” Zang does not believe that cap rates will compress into the 5% territory because more buyers--namely 1031 exchange buyers--have entered the market to stay. “The 1031 buyers are back,” he says. “I would say three out of every four deals now include an exchange buyer whereas last year it was one out of three.”