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. : A high quality tenant like a national company with a strong credit rating comes with less credit risk, which pushes the cap rate lower. A propertys capitalization rate cap rate for short is a performance metric that describes the ratio between its net operating income (NOI) and value. Ronny was incredibly adept and responsive top-notch professional who arranged impressive term sheets. The price and asset value for triple net leased properties are driven by the propertys cap rate. $^A`Y` `vX\L*#A&4DX "eUu1$c` ^(I l The lessor might have the right to consent in any new purpose for the property. According to the FDIC, the number of bank branch closings surpassed the number of bank branch openings for each of the past 11 years. Net Leased C-Store and Gas Station Portfolio Sold. This represented a 12 basis point decrease when compared to the prior year. 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. Consequently, these properties experienced the greatest amount of compression in the sector.. [email protected]. Over the past decade, ALDI has nearly doubled in size. The 10-Year Treasury rate is expected to rise to at least 2.1% by mid-year with the current rate recording at 1.9%. First National Realty Partners is one of the countrys leading private equity commercial real estate investment firms. Commercial real estate investment property leases can be grouped into two categories, gross and net. The initial lease terms, on an annual basis, were: Ground leases have their advantages and disadvantages. Keep in mind that Assets America can help finance the construction or renovation of commercial property through our network of private investors and banks. Ground Lease Permanent Loan Amount LTV - Enter the loan-to-value of the ground lease mortgage, and the model will calculate the loan amount. Retail trade sales recorded an increase of 26.9% YOY while motor vehicle and parts were up 71.1%. It hasn't changed from 2021 but is up from 2018 when it was $1,220/mo. The lease will specify whether they revert to the lessor or the lessee must remove them. : 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. In addition, interest rates are rising, inflation is at a 40 year high, and housing affordability continues to be a major issue. We later used Assets America for a unique equipment financing deal where once again Ronny and team exceeded our expectations and our timeline. Investor Survey. Cap rates in Q1 compressed 3bps compared to Q4. The lenders requirements for applying the condemnation proceeds and controlling termination rights mirror those for casualty events. During the first half of 2021, households will likely continue to self-quarantine and a wave of bankruptcies will increase the number of permanent job losses. In todays market, its especially important to understand the impact the ongoing pandemic has had on the relationship between length of lease term and capitalization rates across all product types, as well as how the pandemic has affected buyer bias toward certain sectors. We sought out the services of Ronny, CFO of Assets America. While there has been a growing demand on homeschool companies, more net lease investors are seeking newly developed education space to perform higher yields as on-campus restrictions fluctuate. For those, the long term trend is that property values rise slowly. Assets America was incredibly helpful and professional in assisting us in purchasing our property. In Q4, we saw the first palpable effect from the extreme inflation the US reported in October. The current edition is 1st Quarter 2023 edition (4th Quarter 2022 data). However, many investors who discovered the asset class in the last decade as they chased yield are realizing its increasingly difficult to find in todays market. Annual Interest Rate - The annual rate to be paid on the mortgage. The impact of pandemic has forever changed most restaurant business functions, especially the casual dining sector. Despite retail bank headwinds, The Boulder Group cites tenant credit and low interest rate as the primary reasons. Ronny found us several commercial properties which met our desired needs. The number of properties trading hands in this sector increase back to historical averages and have held steady, 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 and sizable returns. A low cap rate means higher value and a high cap rate means lower value. The sector is largely dominated by Walgreens transactions. %PDF-1.7 % Low cap rates mean less risk, which is why investors are satisfied with a lower return. Year-End Inflation | Closed at 6.8% highest in nearly 40 years & forecasted to average 7% in 1Q/22, GDP | Expected to grow 4.0% in 2022, down from 6.9% growth in 2021. The lessee must arrange title insurance for its leasehold. 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. Lessors want the right to increase rents after specified periods so that it maintains market-level rents. Will a Recession Lower Your Property Taxes? In a net lease, the tenant is responsible for some or all of them, depending on which type of net lease they have signed. : Properties with longer term leases have less risk (lower cap rates) than properties with short term leases. Here are some components that go into structuring a ground lease: The lease must be sufficiently long to allow the lessee to amortize the cost of the improvements it makes. According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report. The impact of COVID-19 has forever changed most restaurant business functions. Cap rates for Q1 recorded at 6.45% while the average lease term dropped to 8 years from 10 years in Q4. Secondary. Currently, the average cap rate for net lease industrial sits at 5.8 percent. The Boulder Group is a boutique, Chicago-based investment real estate services firm specializing in transaction and advisory services for single tenant net lease properties. On a 30-year mortgage, that means a lease term of at least 35 to 40 years. They are reputable, knowledgeable, and ethical with proven results. [email protected], 954.302.7365 Assets America is a great company to work with. Ronny was very friendly and though we were unable to make something happen at the moment he gave me some direction to go. All of these leases provide benefits and drawbacks to the lessor and lessee. Given the medical industry has been deemed as one of the most important sectors due to the correlation impact of COVID-19, single tenant net leased medical properties saw a slight compression in average cap rates, recording at 6.78% in Q1. For this report, SRS reviewed Q1 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. As we look ahead, the trajectory of the pandemic and vaccine rollout will undoubtedly shape the 2021 economic landscape. Note that the model currently only allows for an interest-only loan. 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. The lender only has the right to claim the leasehold. [email protected]. This will allow you to earn income and possibly capital gains. QSR remains a steady and highly sought-after asset type given the sectors minimal need for adaption compared to other food service providers. Another feature is for the lessor to assist the lessee in obtaining necessary licenses, permits and zoning variances. 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. On one hand, interest rates are rising. A ground lease is more complicated than regular commercial leases. As more people return to work and school, the need for C-Stores will increase. In Q4, an investment sale to note was Home Depot located in Anaheim, CA, which is the largest Home Depot location on the West Coast, traded at $53 million ($259 PSF). His hard work was never ending until the job was done. As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland. This requires special endorsements to the regular owners policy. One way to extract value from the land is to sign a ground lease. : Net leased properties should be conservatively underwritten with manageable debt loads that have fixed interest rates, strong locations, and high quality tenants. 57 0 obj <> endobj In particular, the so-called risk free rate on the 10-year US Treasury has risen from 1.08% to ~1.70% in the first few weeks of 2022. , the fastest increase in nearly 20 years. The lender controls insurance proceeds stemming from casualty and condemnation. For the third consecutive year, the median term remaining for the bank ground lease sector was below 10 years., Net lease investors will continue to monitor the bank sector following the Covid-19 environment which temporarily closed many bank branches aside from drive-thrus. Consumers are pivoting to digital purchases, electronic and used car sales. 2022 Assets America, Inc. All Rights Reserved. Moreover, Q4 saw the most NNN Medical or Medtail transactions of any other quarter in 2021. Of the four net lease types described above, single tenant properties with, triple net leases are particularly popular with individual investors. 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. The CRS captures 3,600 cap rate estimates across more than 50 geographic markets to generate key insights from a wealth of data. *Note: this report captures data only for transactions which have reported a sale price and capitalization rate. [email protected], 954.302.7365 Typically, the lessee controls and depreciates the improvements during the lease period. It is expected there will be an 8% rise in 2021 sales for the auto industry. 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. As pharmacy stores are being looked at as another shopping alternative for consumers and pharmacists roles have changed given their accessibility to the public as health care professions, it is expected cap rates will remain relatively flat or slightly compressed through 2021. is one of the countrys leading private equity commercial real estate investment firms. [email protected], 949.698.1115 Starting at just 30 days, Blueground's leases are highly flexible should you want to stay in a short term apartment rental in Istanbul, or sign a multi-year long term rental lease. As early 2021 closings were pushed ahead into the previous quarter, first quarter sales activity appears to have lost momentum with a 50 percent drop to $6.2 billion in sales. Conversely, anything that lowers the risk profile drives cap rates lower, which means that the market value of the property rises. 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