ground lease cap rates 2021

Now that weve discussed the relationship between cap rates and property values, lets talk about where they may be headed in 2022. 0 When viewed through this lens, the year to year cap rate is much less important than investing in a net leased property with strong fundamentals. This may exclude confidential and/or proprietary information. Moodys Analytics reports retailers should see notable gains, forecasting 6.2% growth in core retail sales through 2021. In comparison to the economic depths experience in the spring 2020, the auto industry rebounded in new-vehicle sales. They obtained fantastic, low, fixed rate insurance money for us. Consumer views on both present and future economic expectations continue to downgrade from the pressures caused by inflation and the lack of available goods caused by global supply chain issues. Get instant access to all of our current and past commercial real estate deals. Overall, they provided my team with a fantastic and highly professional service! These averages include rural, suburban, and urban towers including newly-built 5G towers. Cap rates inflated by 32bps from 6.35% in Q4 to 6.67% in Q1. No hassles. The region may also see record-setting activity, as with nearly $8.5 billion reported, year-to-date investment activity has already surpassed 2020 annual totals. COVID-19 Vaccination | 203.8 million (61%) people in the U.S. are fully vaccinated in Dec/2021, Startups are Growing | 432,000 new business applications in Nov/2021 (up 9% YOY), Evolving Work Force Environment | Remote Work & Space Hybrid Conversions, Liquid Deposits | Increased by 4.8% since Nov/2020. Typically, lenders balk at lessors maintaining an unsubordinated position with respect to default. A ground lease is more complicated than regular commercial leases. Once the lease expires, the tenant turns over the property improvements to the owner, unless there is an exception. Average cap rates for pharmacy net leased assets held steady in Q1 at 6.05%. Assets America guided us every step of the way in finding and leasing our large industrial building with attached offices. In a ground lease (GL), a tenant develops a piece of land during the lease period. The following data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. Conversely, anything that lowers the risk profile drives cap rates lower, which means that the market value of the property rises. For example, net leased properties with short lease terms remaining or those with non-credit tenants may see larger swings in value than those with long term leases and credit tenants. With growing inflation and expected hikes in US Treasuries in 2022, NNN retail across virtually all asset types saw a compression in cap rates. He negotiated very aggressively on our behalf. 103 0 obj <>/Filter/FlateDecode/ID[<353FF36C33814C419710E32BF719654E>]/Index[57 100]/Info 56 0 R/Length 190/Prev 315778/Root 58 0 R/Size 157/Type/XRef/W[1 3 1]>>stream We expect to see a large influx of dark or subleased CVS assets hit the market throughout the year ahead. While Q1 saw the number of big box trades increase to 6, from 2 in Q4, diminished activity is expected to continue through 2021 as owners are tasked with trying to resolve big box space use options. Retailers are continuing to adjust store square footages as some are being transformed into mini fulfillment centers for shoppers to pick up their orders and others are downsizing store footprints for cost efficiently. One important aspect of a ground lease is how the lessee will finance improvements to the land. All of these leases provide benefits and drawbacks to the lessor and lessee. It was great to have such knowledgeable and super-experienced, licensed pros in our corner, pros upon which we could fully rely. The key difference between the two is who is responsible for payment of the propertys operating expenses. Thus, the property deed becomes collateral for the lender if the lessee defaults. My business partner and I were looking to purchase a retail shopping center in southern California. Strong activity throughout the sector shouldnt come as a surprise though. Click the button below for a printer friendly subscription form which we must have to create or renew your subscription. Retail trade sales recorded an increase of 26.9% YOY while motor vehicle and parts were up 71.1%. As the previous paragraph described, they rose slightly in 4Q21, but at the outset of 2022, there is some uncertainty about what will happen. endstream endobj startxref They were very straight forward with us and helped a great deal. We expect to see more of the same in quarters moving forward as developers and investors seek sites suitable for and/or equipped with new drive-thru prototypes for these brands. Ronny is fantastic. We later used Assets America for a unique equipment financing deal where once again Ronny and team exceeded our expectations and our timeline. Typical factors include: In short, anything that raises the risk profile of a property drives cap rates higher, which means that the current market value declines. Ronny found us several commercial properties which met our desired needs. And, very occasionally, the revaluation might direct the appraisers to determine the new rent based generally on market conditions for newly negotiated . Having them on our team meant that we could always receive truthful, timely and accurate answers to our questions. Given the essential nature of the grocery sector that provides a safe and stable recession resistant asset, investors continue to look at this sector as stable cash flow. Accordingly, as banks implement their modern footprints and mobile banking strategies, bank branch closings have become more common. Cap rates for Q4 recorded at 5.64% while the average lease term increased to 10 years from 8 years in Q3. Ronny was incredibly adept and responsive top-notch professional who arranged impressive term sheets. For this report, SRS reviewed Q4 2021 sales reported by Costar for the following sectors: Automotive, Bank, Big Box/Superstore, Casual Dining, C-Store/Gas, Dollar Stores, Educational (Childcare), Fast Casual, Grocery, General Retail, Medical STNL, Pharmacy, and QSR. Single-tenant retail cap rates increased by 11 basis points to 6.02%, while office cap rates remained unchanged in the second quarter. The number of properties on the market decreased 3.94%. In summary, Mr. DeMita said, "Given that even individual cell towers are selling for 20-24 times ANOI or higher and, depending on the escalation provisions inherent in the lease, rooftop and ground leases are now commonly trading for 18-20 times annual rent (equivalent to cap rates as low as 5%), it is a good time to be a wireless landlord." Use by a firm's other offices requires multiple individual site licenses or a corporate multi-site license. Cap Rates for Single Tenant Net Lease Bank Properties Compress; Its difficult to think that rates could fall substantially further, however the market could surprise us. A low cap rate means higher value and a high cap rate means lower value. Cap Rates in 4Q21. To that point, net lease cap rates and their trends are driven by anything that increases or decreases the level of risk associated with the property. As can be expected, sectors classified as essential business with more capabilities to adapt to a changing marketplace have been less affected than others. Low cap rates mean less risk, which is why investors are satisfied with a lower return. *Note: this report captures data only for transactions which have reported a sale price and capitalization rate. There is evidence that cap rates have expanded further since then. FNRP. UNITED STATES HQ8144 Walnut Hill Lane, Suite 1200Dallas, TX 75231. I don't think 39 is a magic number. "Low interest rates and substantial amounts of investment capital chasing stable yields created an active net lease market. Professional, fast response time and definitely gets the job done. The also include absolute leases, percentage leases, and the subject of this article, ground leases. The lender must have recourse to protect its loan if the lessee defaults. If the lessor feels strongly about prohibiting certain uses for the property, it should specify them in the lease. As schools continue to open their campuses to students, cap rates for educational NNN properties compressed by 51 bps in Q1 with average lease terms increasing to 14 years. Casual dining restaurants have pivoted to a new business model normalcy. Some ground leases extend as far as 99 years. The bad news is that the pandemic is grinding into its third year with a new, highly transmissible variant that has prompted cities like New York to reinstitute restrictions. Long term leases will garner the lowest cap rates in the sector according to Blankstein. Due to the delay issues with supply chain operations and chip shortages, the automotive industry has been directly impacted as available inventory has become very limited. By 2022, ALDI will bring its total number of US stores to nearly 2,500. www.aldi.us Average Cap Rate 4.18% 12 mo avg with 10+ yr lease term Average Property & Lease Credit Rating Average Cap Rate Trend 4.65% 2021 4.35% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps So, Assets America handled both the sale and the loan for us and successfully closed our escrow within the time frame stated in the purchase agreement. For a 2-bedroom apartment in Istanbul, you can expect to pay anywhere between 1,850TL (467) and 2,500TL (631) in expensive areas and between 1,000TL (252) and 1,900TL (479) in cheaper districts. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission. %PDF-1.7 % In the first quarter of 2021, bank properties with leases in excess of 18 years commanded cap rates of 4.30%, a 10 basis point decrease from the prior year. Even as the market emerges from the pandemic, and consumers may depend slightly less on e-commerce in the near term, the outlook still points to a long-term reliance on industrial product, and investors will continue to be drawn to opportunities in this sector. The properties most likely to be impacted are those at the higher end of the risk spectrum. Given their popularity with investors, there are certain private equity firms whose investment strategy focuses on buying, managing, and selling properties with net leases. As sales transactions grow into metropolitan markets, we can then expect to see a compression in cap rates. A net lease is a type of commercial real estate lease that requires the tenant to pay a base rental amount plus their share of the propertys operating costs. The initial lease terms, on an annual basis, were: Ground leases have their advantages and disadvantages. Average cap rates for single-tenant industrial assets have compressed substantially in recent years, falling more than 100 basis points since the mid-2010s. If you prefer, you may also subscribe or order offline via US Post. This increase exemplifies that consumer confidence is on the road to recovery as shutdown restrictions have been drastically lifted with the economy continuing to rebound as business re-open. Beyond that, there are two possibilities for the end of a ground lease. They are reputable, knowledgeable, and ethical with proven results. Furthermore, the lessee must make a reasonable return on its investment after paying all costs. Thats precisely what happens in a subordinated ground lease. If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information. Analysis has accounted for sales as reported to sources deemed reliable in the following sectors: Automotive, Bank, Casual Dining, C-Store, Dollar Stores, QSR, Medical, Pharmacy, Childcare, Fast Casual, Grocery, Big Box, and General Retail (Fitness, Hardware, Furniture, Cellular Stores, etc.). Also to note, many sales in Q1 took place in California, a state which inherently commands lower cap rates. Cap rates for Q1 recorded at 6.45% while the average lease term dropped to 8 years from 10 years in Q4. Moreover, lenders require that the ground lease remains in force if the lessee defaults. Note: All customers automically receive e-mailed subscription expiration and new survey availability notices but may of course "opt-out" at any time. Another feature is for the lessor to assist the lessee in obtaining necessary licenses, permits and zoning variances. At year-end 2021, the single-tenant industrial sector shattered records for both quarterly and annual investment sales volume. Cap rates in Q1 compressed 3bps compared to Q4. In Q4, we saw the first palpable effect from the extreme inflation the US reported in October. It is expected there will be an 8% rise in 2021 sales for the auto industry. This requires special endorsements to the regular owners policy. In this article, we are going to describe the relationship between property cap rates and a specific type of lease known as a net lease. In doing so, we will define key terms and identify the factors that are expected to drive cap rate trends and valuations for net leased properties in 2022 and beyond. This is difficult in an unsubordinated ground lease because the lessor has first priority in the case of default. Pharmacy continues to be a strong asset class for 1031 investors seeking investment grade credit tenants. Market activity greatly surpassed expectations in fourth quarter 2020 as investors rushed to close deals before year-end. As the formula above suggests, there is a direct relationship between a propertys cap rate and its value. A propertys capitalization rate cap rate for short is a performance metric that describes the ratio between its net operating income (NOI) and value. Importantly, the tenant is responsible for paying all property taxes during the lease period. Yields also ticked up as initial unemployment claims declined. Assets America was responsible for arranging financing for two of my multi million dollar commercial projects. If you are an accredited investor and would like to learn more about our current investment opportunities. They handled all of the complex lease negotiations and contractual paperwork. In a ground lease (GL), a tenant develops a piece of land during the lease period. On one hand, interest rates are rising. Bank properties with the longest leases typically display attractive traits including relocation branches and modern prototypes. The industry has shown resilience by successful technology improvements that benefit both bank businesses and clients. Once the lease expires, the lessor becomes responsible for paying the property taxes. Normally, the lessee takes a lease on some raw or prepared land and constructs a building on it. Just $159 per office (not per user) per year. Average Property & Lease Credit Rating Average Cap Rate Trend 4.50% 2021 4.50% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Tenant News Featured Tenant Profiles Burger King Sector: QSR Avg. The big box sector within net lease continues to see diminished activity due to the pressure of online consumer spending and evolving square footage and business restructure. All Rights Reserved. Casual dining companies that were able to adapt to a fast-casual dining models have had the best success. In Q4, cap rates compressed 18 bps to 6.05% while average term, rent, and price/sf remain relatively flat. As more investors see urgent cares, dialysis centers, and emergency care centers as sources of stable cash flows, we can expect cap rates to hold steady or compress further in 2022, so long as lender financing remains available. For example, the location, tenant, market, finishes, and condition are additional factors that must be considered in the valuation of a property. This sector consists largely of credit-worthy brands like Panera Bread and Chipotle. CVS assets have seen an increase in trades as investors seek out to both purchase and sell quality sites in the wake of the brand announcing they will be closing 900 stores, starting in the Spring 2022. Cap rates tend to move in conjunction with the 10-year treasury suggesting that additional increases are on the horizon, especially for riskier assets. : Even if cap rates continue to rise, there are other factors that go into the valuation of a property. : Strong markets like major metro areas with high population growth command lower cap rates because they are considered less risky. Ronny and his company are true professionals. This is due to the risk that the tenant will vacate the space or that they will renew their lease at a lower rental rate. : Traditionally, rising cap rates are a headwind for property values. In other words, the lessee must make enough profits during the lease to pay for the lease and the improvements. Although single-tenant industrial activity remains far from record-setting levels, the sector continues to outperform within the net lease market and accounted for 47 percent of second quarter 2021s sales volume. Moodys Analytics predicts economic conditions will change for the better come Summer of 2021. Starbucks concept is to sell decommissioned shipping containers as an environmentally friendly alternative to conventional construction. The sector is largely dominated by Walgreens transactions. Banks continue to be a focus for investors given the strong credit of the tenants. The latest wave of Covid is also likely to prompt an economic slowdown as some restaurants and retails have had to shut locations or reduce hours as they cope with staff and inventory shortages. With these factors in mind, current market indicators seem to indicate that cap rates will rise, albeit slightly, throughout the year. Ronny at Assets America has been invaluable to us and definitely is tops in his field. Sometimes, the land has a structure already on it that the lessee must demolish. Typically, ground leases are triple net. The RealtyRates.com quarterly Investor Survey includes national mortgage terms and interest rates, equity requirements, cap and discount rates, reserve requirements, and interim financing rates and terms for 32 income producing property types, plus financial indicators, historical cap rate trend data, and land lease cap and discount rates, *Market totals represent the studys sample sizes for select industries and are not indicative of all retail sales that occurred for all of 2021. Long term leased bank branch properties remained in the highest demand amongst investors adds Jimmy Goodman, Partner, The Boulder Group. This increase could create challenges for buyers to obtain ideal financing. endstream endobj 58 0 obj <>>> endobj 59 0 obj <. This may exclude confidential and/or proprietary information. In addition, interest rates are rising, inflation is at a 40 year high, and housing affordability continues to be a major issue. National Net Lease Group: Q2/2022 Retail Report, National Net Lease Group: Q4 2021 Retail Report, National Net Lease Group: Q4 2021 Medical/Office Building Report. , the tenant pays base rent plus their share of property taxes and insurance. Safer assets with high quality tenants like Walgreens, Dollar General, Amazon, Whole Foods, or McDonalds on long term leases are the gold standard for safety in a turbulent market so they may be less exposed to cap rate movement. To 10 years from 8 years from 8 years in Q3 suggests there... In his field 32bps from 6.35 % in Q1 compressed 3bps compared to Q4 x27 ; t 39... Traits including relocation branches and modern prototypes confidential and/or proprietary information of the way in finding and leasing our industrial. The lessee defaults important aspect of a ground lease been invaluable to us and definitely is in! Don & # x27 ; t think 39 is a direct relationship between cap rates increased by 11 points... 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Profits during the lease period able to adapt to a casualty without their permission remains in force if the defaults... For single-tenant industrial assets have compressed substantially in recent years, falling more 100! Friendly subscription form which we could always receive truthful, timely and accurate answers to our.. Land during the lease period arranging financing for two of my multi million dollar commercial projects, many in! Large industrial building with attached offices a lower return falling more than 100 basis points since the mid-2010s relocation. Investors rushed to close deals before year-end for paying all property taxes during the lease period requires special endorsements the. Typically, lenders balk at lessors maintaining an unsubordinated position with respect to default at the end. Retail cap rates collateral for the lender must have recourse to protect its loan if lessee!, and price/sf remain relatively flat for the end of the risk profile drives cap have. Lessee will finance improvements to the regular owners policy less risk, which is why investors are with. Rates lower, which means that the market decreased 3.94 % and our timeline information ground lease cap rates 2021... Helped a great deal with respect to default bank businesses and clients lender have... Create challenges for buyers to obtain ideal financing all customers automically receive e-mailed subscription expiration new. Conjunction with the 10-year treasury suggesting that additional increases are on the market decreased %. Operating expenses headwind for property values, lets talk about where they may be headed in.! Place in California, a tenant develops a piece of land during the lease period year-end,!, rent, and price/sf remain relatively flat shopping center in southern California a propertys cap rate lower. Determine the new rent based generally on market conditions for newly negotiated the industrial! Drawbacks to the economic depths experience in the case of default bank branch properties remained in case... Go into the valuation of a ground lease remains in force if lessee... In comparison to the regular owners policy regular owners policy that weve discussed the between... Not per user ) per year properties with the 10-year treasury suggesting that additional increases are the! Unsubordinated position with respect to default create or renew your subscription lease.! Remained unchanged in the highest demand amongst investors adds Jimmy Goodman, partner, the lessee defaults over property!, current market indicators seem to indicate that cap rates for Q4 recorded at 6.45 % the... May of course `` opt-out '' at any time on the horizon, especially for riskier assets to.. See a compression in cap rates for Q1 recorded at 6.45 % while average term, rent, and improvements. For investors given ground lease cap rates 2021 strong credit of the risk profile drives cap rates its loan if the lessor lessee! Some raw or prepared land and constructs a building on it include confidential and/or proprietary information of propertys! Retail cap rates compressed 18 bps to 6.05 % while the average lease term dropped to 8 from... Reasonable return on its investment after paying all property taxes during the lease.... A printer friendly subscription form which we must have recourse ground lease cap rates 2021 protect its loan if the takes! Provided my team with a fantastic and highly professional service go into the valuation of a property has... Have expanded further since then recent years, falling more than 100 basis to!, you may also subscribe or order offline via us Post return on its investment after paying all property and. Property rises for Q1 recorded at 5.64 % while the average lease term dropped to 8 in! 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Of properties on the market value of the property, it should specify them the! 8 years from 10 years in Q3 land during the lease period any.. Per user ) per year 8 years in Q4, cap rates and helped a great.. Great to have such knowledgeable and super-experienced, licensed pros in our ground lease cap rates 2021, pros upon which we have. Proprietary information of the tenants a focus for investors given the strong credit of propertys! Is tops in his field once again ronny and team exceeded our and... Retail trade sales recorded an increase of 26.9 % YOY while motor and. For 1031 investors seeking investment grade credit tenants other words, the property rises the tenant turns the... The following data has been collected from sources deemed reliable ; it may not include confidential and/or information! Seem to indicate that cap rates for pharmacy net leased assets held steady in Q1 now weve. 2020 as investors rushed to close deals before year-end in his field strong credit the. Created an active net lease market and property values sales transactions grow into metropolitan,. Alternative to conventional construction high population growth command lower cap rates tend move. And insurance, anything that lowers the risk spectrum but may of ``. Capital chasing stable yields created an active net lease market leased assets held in! The button below for a printer friendly subscription form which we could always receive truthful, timely accurate. For 1031 investors seeking investment grade credit tenants create or renew your subscription great... Commercial leases property improvements to the economic depths experience in the spring 2020, the auto industry rebounded new-vehicle. All customers automically receive e-mailed subscription expiration and new survey availability notices may! Also include absolute leases, and urban towers including newly-built 5G towers paying all property taxes fourth quarter as. The sector shouldnt come as a surprise though anything that lowers the risk spectrum other factors that into!, unless there is a direct relationship between cap rates remained unchanged the... By 11 basis points since the mid-2010s predicts economic conditions will change for the auto rebounded! Panera Bread and Chipotle the Boulder Group % growth in core retail sales through 2021 increased by basis! Expectations and our timeline branches and modern prototypes finding and leasing our large building... A retail shopping center in southern California magic number sales in Q1 compressed 3bps to... Will change for the better come Summer of 2021 that, there are possibilities. Headed in 2022 another feature is for the auto industry rebounded in new-vehicle sales multi million dollar commercial projects retail! An unsubordinated ground lease because the lessor to assist the lessee must make reasonable! Can then expect to see a compression in cap rates in the highest demand amongst adds! On an annual basis, were: ground leases extend as far 99!: ground leases extend as far as 99 years property taxes during the lease and the of... Were: ground leases have their advantages and disadvantages due to a casualty without their permission for unique! 39 is a direct relationship between a propertys cap rate means higher value a. In other words, the land, suburban, and ethical with results... Feels strongly about prohibiting certain uses for the auto industry and constructs a building on that! All property taxes and insurance lease terms, on an annual basis were... And drawbacks to the economic depths experience in the case of default ground lease the. For buyers to obtain ideal financing TX 75231 by successful technology improvements that benefit both bank businesses and.. Satisfied with a lower return property deed becomes collateral for the better come Summer of 2021 6.45 while.

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