NNN McDonalds Trades Below a 4% Cap Rate

LOS ANGELES—A private investor has purchased a triple-net leased McDonald's property in Hawthorne, CA, from a partnership between Starpoint Commercial Properties & HRI Development. The newly constructed property traded at a historically low cap rate of 3.75%.

“The cap rate we achieved is not a standard cap rate for McDonalds, historically. In the past 18 months cap rates in California have compressed to historically low levels due to the lack of inventory and flight to quality by foreign investors,” Ara Rostamian, a broker with Strategic Development Advisors, tells GlobeSt.com. “Also, due to the compression in cap rates for apartments, many baby boomer investors have been selling their multifamily assets and moving their equity and capital gains into stable long term single tenant retail investments. I believe this increase in the sales of other product types and the age factor of the investors selling their assets is also contributing to the swarm of offers on many of these new well located net leased retail assets.” Rostamian represented the seller in the transaction. John Archibald of Coldwell Banker Commercial Alliance represented the buyer.

McDonald's has a 20-year ground lease at the property with eight five-year extension options, making the property all the more appealing to investors. Once the property was marketed, the sales tea, received interest from more than 100 prospective buyers, which turned into several full asking-price offers and a few offers the exceeded the asking price. “We navigated through the selection process and picked seven strong offers at sub 4% cap rate for final consideration. The buyers were all cash and many of them were looking to satisfy their 1031 exchange requirement. In the end we found the perfect investor with the right timing willing to pay full asking price.” In the end, the property traded for $3.6 million.

These historically low cap rates, driven by the limited market supply, illustrate the strength of the net lease market. “The net leased retail market does not show any indication of cooling down,” says Rostamian. “Economic conditions overseas continue to push flight to quality to the US for safe and long term cash flow. Another driver for further compressed cap rates is the lack of new supply coming online to satisfy demand. The desire for a corporate backed tenant like McDonald's and tenants like Starbucks will continue to grow as long as investors know their cash flow will be safe and stable.”