Quick-Service Restaurants, Auto Parts Outperform; Fast Casual Restaurants, Dollar Stores Weaken

Our Q2 2018 Single Tenant Net Lease Retail Report states that single tenant spaces are considered less vulnerable than other investment asset classes and will continue to be a great hedge against the headwinds that can affect equities, despite the recent and pending interest rate hikes. Since net lease buyers are purchasing existing sites with income in place, it eliminates the risk of lease-ups, providing opportunities to lock in strong yields in hard assets.

Key takeaways from this report include:

  • From Q2 2017 to Q2 2018, cap rates ticked up 15 basis points (bps) from 5.97% to 6.12%.
  • The first half of 2018 was a see-saw for single tenant net lease (STNL) with transaction volume down -3.2% but number of sales up +5.1%. In contrast, retail transaction volume was up +4.4% but sales were down -2.9% vs. 2017.
  • Of the chains we track, stores offered for sale on average were smaller and older, and spent less time listed on market.
  • Fast food/quick-service restaurants (QSRs) saw a slight dip in cap rates in 2018 vs. 2017, bucking the overall trend of stable to rising cap rates.
  • With a rising 10-year treasury, the spread on cap rates compressed further and remains below 400 bps. The Fed has signaled its intention to hike rates 3 more times through 2019.
  • Consumer sentiment continues to climb but inflation concerns are mounting.
  • Six-month total retail sales grew 5.2% in 2018 vs. 2017, unchanged from the prior year. Gasoline retailers leapfrogged e-commerce for the top spot in 2018 posting a 13.1% year-over- year increase. Net of gasoline, retail sales grew 4.4% year over year.
  • Clothing & accessories and health & personal care recovered vs. 2017, posting 4.6% and 3.9% year-over-year changes vs. an anemic 0.9% and 0.7% year-over-year growth the previous year.