Retail Investment Property Capitalization Rates

A recent survey conducted within Sperry Van Ness revealed some interesting trends regarding the capitalization rates being delivered by properties net leased to leading national retailers. The survey, while providing primarily anecdotal information, contained a large enough sample size that it should be considered reliable for investors seeking to compare returns among various retailers' real estate. The study period included sales closed during 2009.

A table documenting the results of the survey is presented below:

Tenant                 Approx. Cap Rate
Dollar General                9.00%
Family Dollar                  9.00%
Applebee's                     9.00%
Macaroni Grill                9.00%
Advance Auto                8.20%
YUM (Taco Bell/KFC)      7.75%
Walgreen's                     7.75%
Best Buy                        7.50%
McDonald's                     7.25%

The results displayed represent averages for the various property categories. Obviously capitalization rates are affected by a variety of factors such as lease term, tenant credit, specific location, and regional economic environments. It was noted that information on McDonald's investments was primarily composed of ground leases. Ground leases, all other things being equal, often provide as much as a 50 basis point higher return than do their brick-and-mortar counterparts.  Bank ground leases, while not presented in the table, were reported to be yielding cap rates of around 8.0%. Similarly, FedEx (not reported here because considered industrial) net leased sales, were tracking at a similar return.

Several "take aways" result from this information. First, cap rates continue to inch higher. They have reached 10% for good shopping centers and gone up into the teens for struggling ones.  They are likely to creep higher for single tenant sales before stabilizing.  Second, good returns are being provided to owners of reasonably strong retailers. More and more investors are realizing it will be difficult to approximate 9% returns for investments which provide significantly less risk than does a Dollar General, Family Dollar, or Applebee's guarantee.  Finally, many retailers are adding new product to the investment pipeline. While not plentiful, there appears to be some choice in the marketplace. For some of the retailers above as many as 50 sales were utilized in the analysis. Some of this product is new construction, others are sale-leaseback situations.

Please contact Sperry Van Ness/Fiducia Properties to see how we may assist you in tapping into the retail net lease product line. We're available toll free at 888.879.2083 or via email at greg.finley@svn.com.