Typically, ground leases are triple net. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); document.getElementById( "ak_js_2" ).setAttribute( "value", ( new Date() ).getTime() ); This field is for validation purposes and should be left unchanged. patrick.luther@srsre.com, 954.302.7365 We were thankful for how promptly and consistently they kept us informed and up to date on each step of our journey. Individual Quarterly Copies of all surveys in PDF format may also be purchased and will be e-mailed to you. Market activity greatly surpassed expectations in fourth quarter 2020 as investors rushed to close deals before year-end. In addition, interest rates are rising, inflation is at a 40 year high, and housing affordability continues to be a major issue. Single-tenant retail cap rates increased by 11 basis points to 6.02%, while office cap rates remained unchanged in the second quarter. The data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. : Even if cap rates continue to rise, there are other factors that go into the valuation of a property. If the lessor feels strongly about prohibiting certain uses for the property, it should specify them in the lease. Its difficult to think that rates could fall substantially further, however the market could surprise us. The c-store/gas station space remains to be a very active sector of net lease given the internet resistant foundation as well as being labeled as an essential business. Do you own land, perhaps with dilapidated property on it? Are Grocery Stores and Supermarkets Good Investments? 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 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. endstream endobj startxref Cap rates continue to compress in this sector with the average cap rate falling 5bps from 5.98% in Q3 to 5.93% in Q4. Tenant pays base rent plus their share of property taxes, insurance, and maintenance. It was great to have such knowledgeable and super-experienced, licensed pros in our corner, pros upon which we could fully rely. Pharmacy continues to be a strong asset class for 1031 investors seeking investment grade credit tenants. But buyer demand is strong across virtually all industrial subtypes. Just $159 per office (not per user) per year. Why do lenders have an adverse reaction to ground leases around year 39? Tables may be inserted directly into appraisals and similar business reports. Over the last few years, investors have been gravitating toward industrial product for several reasons. who want exposure to commercial real estate assets, but not the hassle of managing them on a day to day basis. 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 example, when the lease expires, what will happen to the improvements? Assets America was responsible for arranging financing for two of my multi million dollar commercial projects. The Boulder Group announced the release of its Net Lease Bank Properties Ground Lease Report today. 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. Fast turn around. 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. They were always available to answer each and every one of our questions. General retail sectors include fitness, hardware, furniture, home goods, cellular stores and other retail types which do not fall under one of the other focused sectors. The impact of COVID-19 has forever changed most restaurant business functions. The number of properties trading hands in this sector increase back to historical averages, demonstrating how investors are again looking at the net lease retail sector in general as an attractive, low- or zero-management investment market with stable cash flow & sizable returns. The topic of financeability is complex and your legal experts will need to wade through the various intricacies. Despite the lack of inventory, consumer demand has remained strong. 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. Figure 1 shows the degree to which multifamily and industrial yields dominate the lower end of the pricing curve. At the other end of the spectrum, a property like a hotel has higher risk so they command a higher cap rate / lower purchase price. Moodys Analytics reports retailers should see notable gains, forecasting 6.2% growth in core retail sales through 2021. This is difficult in an unsubordinated ground lease because the lessor has first priority in the case of default. : Recently completed or newly renovated properties have less risk (lower cap rates) than older properties. QSR remains a steady and highly sought-after asset type given the sectors minimal need for COVID-19 adaption compared to other food service providers. endstream endobj 58 0 obj <>>> endobj 59 0 obj <. There are four: , the tenant pays base rent plus their share of property taxes. These are mortgages financing the lessees improvements to the ground lease property. * Surveys are usually published within 45 days after the close of the quarter. Starbucks concept is to sell decommissioned shipping containers as an environmentally friendly alternative to conventional construction. Ive worked with this company for decades. This will allow you to earn income and possibly capital gains. At year-end 2021, the single-tenant industrial sector shattered records for both quarterly and annual investment sales volume. In order to understand net lease trends, it is first necessary to understand what net leases are. 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. The cap rate compression associated with the banking sector can be best attributed to the investment grade credit of the tenants and the low interest rate environment says Randy Blankstein, President, The Boulder Group. As more people return to work and school, the need for C-Stores will increase. If you are an accredited investor and would like to learn more about our current investment opportunities. This requires special endorsements to the regular owners policy. Through 2021, cap rates are expected to hold steady as most sales transactions in this sector are trading hands in suburban markets. While there are hundreds of these sites on market, there has been a noticeable decline in the percentage of available discount/dollar assets featuring long lease terms and absolute NNN lease structures. Cap Rate: Understanding Credit Ratings UNITED STATES HQ8144 Walnut Hill Lane, Suite 1200Dallas, TX 75231. Lenders want the GL to serve as collateral should the lessee default. matthew.mousavi@srsre.com, 949.698.1115 Retail profit margins are expected to hit a high of 13% in 2021 as retailers are being challenged with an imbalance of demand and available inventory due supply chain issues. matthew.mousavi@srsre.com, 949.698.1115 The demand on the educational sector has been changing and evolving due to the continued effects of the pandemic. FNRP. Average rates have inched back up a few basis points and now sit at 6.0 percent, but they arent expected to see much volatility for the remainder of the year. The RealtyRates.com quarterly Market Survey includes sales, rent, occupancy, and operating expense data, together with eepense ratios, cap rates and gross rent and effective gross income multipliers for seven core commercial property types including apartments; warehouses and distribution centers; flex/R&D facilities; CBD and suburban offices; and anchored neighborhood and community and unanchored strip retail centers. It hasn't changed from 2021 but is up from 2018 when it was $1,220/mo. Founded in 1997, the firm has closed over $6 billion of net lease property transactions. Note that the model currently only allows for an interest-only loan. Average cap rates for single-tenant industrial assets have compressed substantially in recent years, falling more than 100 basis points since the mid-2010s. : Traditionally, rising cap rates are a headwind for property values. However, this may conflict with the standard wording of a ground lease, which gives some control to the lessor. It is expected the QSR sector cap rates will remain compressed into the first half of 2022 as this sector remains to be a highly sought-after investment opportunity. 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. Over the past decade, ALDI has nearly doubled in size. Keep in mind that Assets America can help finance the construction or renovation of commercial property through our network of private investors and banks. Lessees want the right to obtain a leasehold mortgage without the lenders consent. More than $8.4 billion in investment sales were reported over the last three months, jumping 20 percent from the previous quarter and 72 percent from this time last year. : The good news is that net lease terms often call for periodic rent increases, which can go a long way in helping to offset rising cap rates. More likely, well see industrial cap rates fluctuate in the current range as the highest-quality assets continue to trade through the end of the year and into 2022. 10-Year Treasury Note | expected to rise to near 2% in 2021, up from the current rate of 1.1%* This increase could create challenges for buyers to obtain ideal financing. However, fast food ground leases with shorter amortization periods might have a 20-year lease term. Welcome to CBRE's H2 2021 Cap Rate Survey (CRS), which reflects the views of hundreds of professionals about how sentiment and pricing are changing across multiple dimensions of the commercial real estate market. We would most definitely utilize their services again and again for all of our real estate needs. Of the four net lease types described above, single tenant properties with triple net leases are particularly popular with individual investors who want exposure to commercial real estate assets, but not the hassle of managing them on a day to day basis. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission. Not only was Assets America successful, they were able to obtain an interest rate lower than going rates. Cap rates in Q1 compressed 3bps compared to Q4. Consumer sentiment in November fell to its lowest level since 2011, measuring 66.8. In Q4 its especially important to understand the impact the ongoing pandemic and overall market conditions have had on the relationship between length of lease term and capitalization rates across all product types as well as the effect on buyer bias toward certain sectors. It is helpful to begin by looking at what happened in the fourth quarter of last year. are inherently riskier than others. The lease will specify whether they revert to the lessor or the lessee must remove them. patrick.nutt@srsre.com. Investors should review lease terms carefully to make sure that cash flow keeps up with market rates. One important aspect of a ground lease is how the lessee will finance improvements to the land. The first store opened in Seattle, followed by Kansas City, Denver, Chicago, and one in Portland, OR. Assets America is a great company to work with. In just the last year, weve seen a 14-basis point decrease, and rates have been below the 6.0 percent mark for six consecutive quarters. With negative net branch openings throughout the years, the supply of bank ground leases is heavily concentrated with short term leases John Feeney, Senior Vice President, The Boulder Group adds. 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. I don't think 39 is a magic number. 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, likewise by property type. 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. Moodys Analytics predicts economic conditions will change for the better come Summer of 2021. It is against this backdrop that we look at commercial real estate (CRE) cap rate trends for 2022. Today's low interest/cap rate environment enables parties to fix rent in a stable, long-term fashion. 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.). Tenants with less financial strength push cap rates higher because they present more credit risk. The lender controls insurance proceeds stemming from casualty and condemnation. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in. 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. Average Property & Lease Credit Rating Average Cap Rate Trend 5.07% 2021 4.68% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Understanding Credit Ratings View Credit Rating Chart Moody's Have a Research Project? Consumers have shifted toward personal mobility over public and shared transportation due to the impacts of COVID-19. A propertys capitalization rate cap rate for short is a performance metric that describes the ratio between its net operating income (NOI) and value. The second is that the lessee must demolish the improvements it made. On one hand, interest rates are rising. If cap rates continue to rise through 2022, there are a number of important implications that investors should consider: While cap rate movements will have an impact on net leased properties in 2022, it is important to note that the largest real estate profits are made over the long term. The following data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. The advantages of a ground lease include: The disadvantages of a ground lease include: This is a great commercial lease calculator. Typically, a ground lease lasts from 35 to 99 years. 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. hbbd```b``a Dr\1 LjI#xXW2=@Oq>"&xHTz/? The inherited improvements allow the owner to sell the property for more money, if so desired. Yields also ticked up as initial unemployment claims declined. They were excellent at communicating with us at all times and they were extremely responsive. which we must have to create or renew your subscription. While there has been a growing demand on homeschool companies due to stay at home orders, more net lease investors are seeking newly developed education space to perform higher yields as on-campus restrictions are lifted. BIG BOX/SUPERSTORE As we enter 2022, the net lease market is working to digest a substantial amount of news, both good and bad. Average Cap Rate 3.60% 12 mo avg with 10+ yr lease term Average Property & Lease Credit Rating Average Cap Rate Trend 4.0% 2021 3.63% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Tenant News Featured Tenant Profiles Circle K Walgreens Pharmacy 5.00% Pizza Hut Avg. 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. Use by a firm's other offices requires multiple individual site licenses or a corporate multi-site license. In a ground lease (GL), a tenant develops a piece of land during the lease period. We invite you to contact us for more information about our complete financial services. is one of the countrys leading private equity commercial real estate investment firms. This resulted in a record-setting quarter, where more than $12.5 billion in sales were reported. Annual Online Subscriptions include access to both HTML and PDF versions and all previous editions, as well as such other free resources as Excel templates, special reports, software, and investment and financial calculators. It is expected the QSR sector cap rates will remain relatively flat or slightly compressed through the first half of 2021. As an alternative, a ground lease could theoretically refer to some objective third-party index for long-term capitalization rates for real estate investments at the time of the rent reset. And, very occasionally, the revaluation might direct the appraisers to determine the new rent based generally on market conditions for newly negotiated . Note: All customers automically receive e-mailed subscription expiration and new survey availability notices but may of course "opt-out" at any time. 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