In Q4, we saw the first palpable effect from the extreme inflation the US reported in October. All of these leases provide benefits and drawbacks to the lessor and lessee. According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report. In a gross lease, the commercial property owner pays for them. This resulted in a record-setting quarter, where more than $12.5 billion in sales were reported. Beyond the arrangements for paying rent, a ground lease has several unique features. These brands and others in the industry alike have been able to quickly adapt to customer demand by space remodeling, adding drive-thru to permitted spaces and provide in-app and delivery orders. Single-tenant industrial cap rates have reported significant compression in recent years, falling 65 basis points in the last 24 months to end the year at an average of 5.6 percent. Typically, a ground lease term extends to at lease 5 to 10 years beyond the leasehold mortgage. Totally amazing. Holiday spending helped sentiment rebound up to 70.6, though still a much lower figure than pre-pandemic studies. Will Cap Rates Continue to Increase in 2022? But, supply constraints for net leased properties and high investor demand provide conflicting evidence that they may be more stable than the treasury move would suggest. He negotiated very aggressively on our behalf. Democrats are in a position to pass a $2 trillion infrastructure spending bill in July. In a net lease, the tenant is responsible for some or all of them, depending on which type of net lease they have signed. One way to extract value from the land is to sign a ground lease. The lender controls insurance proceeds stemming from casualty and condemnation. The Boulder Group announced the release of its Net Lease Bank Properties Ground Lease Report today. We would most definitely utilize their services again and again for all of our real estate needs. The industry has shown resilience by successful technology improvements that benefit both bank businesses and clients. Cap Rate: 4.78% Truist Bank Sector: Bank Avg. They were always available to answer each and every one of our questions. Investors targeting properties in the bank sector are cognizant of the everchanging banking environment related to mobile banking and the evolving branch footprints. On one hand, interest rates are rising. Cap rates are holding steady with rates inflating just 5bps in 1Q. matthew.mousavi@srsre.com, 949.698.1115 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. Over the last few years, investors have been gravitating toward industrial product for several reasons. 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. 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. These brands and others in the industry alike have been able to quickly adapt to customer demand by space remodeling, adding drive-thru to permitted spaces and provide in-app and delivery orders. Credit/debit cards processed by Authorize.net. Revenue for C-Stores is expected to grow at an annual rate of 2% until 2026. Once the lease expires, the tenant turns over the property improvements to the owner, unless there is an exception. 5 Key Factors That Can Kill a Real Estate Cycle, Avalon Investment Inks HQ Lease at LA-Area Property, Top 10 Markets for Office Deliveries in 2022. Typically, lenders balk at lessors maintaining an unsubordinated position with respect to default. In the first quarter national asking cap rates in the single tenant bank ground lease sector increased to 5.47%, according to the Q12020 Net Lease Bank Report This represented a 17 basis. Expect this sector to continue to outperform other sectors as flight to safety and recession resistance remains to be a target for investors. Annual Interest Rate - The annual rate to be paid on the mortgage. Assets America will arrange financing for commercial projects starting at $20 million, with no upper limit. 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? 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. The average cap rate compressed by 39bps from Q4 to Q1 while the average lease term has remained at 9 years. Quarterly sales volume was down across all regions of the single-tenant industrial market in first quarter 2021, however, the data is a bit deceiving. Sometimes, the land has a structure already on it that the lessee must demolish. 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. The discount dollar sector continues to be one of the most highly sought-after spaces as investors target growth opportunities. This may exclude confidential and/or proprietary information. who want exposure to commercial real estate assets, but not the hassle of managing them on a day to day basis. 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. There is a direct relationship between a net leased propertys value and its cap rate. Starbucks concept is to sell decommissioned shipping containers as an environmentally friendly alternative to conventional construction. It does the rest. By subscribing or purchasing surveys, you agree to our Terms of Use in their entirety including copyright provisions and the restrictions that accompany an ordinary annual subscription which represents a single site license, the use of which is limited to employees of a single office. *Note: this report captures data only for transactions which have reported a sale price and capitalization rate. Bank institutions that made strategic technology investments prior to COVID-19 have performed stronger. Single-tenant retail cap rates increased by 11 basis points to 6.02%, while office cap rates remained unchanged in the second quarter. Using a market capitalization rate of 9.00 percent indicates that net income of $13.43/SF would need to be achieved to justify an investment of $149.26/SF ($149.26 x .09 = $13.43); assuming vacancy and collection loss of five percent, an absolute net rental rate of $14.14/SF would be needed to achieve this level of net income ($13.43 0.95). The company is very capable, I would recommend Assets America to any company requiring commercial financing. 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.). This breaks down to retail trade sales recording an increase of 16.1% YOY, while gasoline stations were up 52.3% and food and beverage services were up 37.4% YOY. The RealtyRates.com quarterly Developer Survey includes actual and pro-forma discount rates for 22 sell-out property types including subdivisions, PUDs, business and industrial parks, and residential and commercial condominiums and co-ops. This newly set quarterly record also pushed annual totals to a new high with more than $47.8 billion reported for the year. 2023 Commercial Property Executive. All Rights Reserved. In Q1, cap rates held steady in the 7% range (6bps compression from Q4) as the average term, rent, and Price/SF remain relatively flat. In addition to the real estate lease, Assets America utilized their decades-long financial expertise to negotiate fantastic rates and terms on our large and very unique multimillion dollar equipment purchase/lease. Banks continue to be a focus for investors given the strong credit of the tenants. The Discount Dollar sector continues to be one of the most highly sought-after spaces as investors target growth opportunities given high volume of sale transactions being made in comparison to other retail sectors. Cap rates for Q4 recorded at 5.64% while the average lease term increased to 10 years from 8 years in Q3. 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. 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. 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. 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. Alternatively, an unsubordinated ground lease maintains the landlords top priority claims if the leaseholder defaults on his payments. 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. It is expected there will be an 8% rise in 2021 sales for the auto industry. Average cap rates for single-tenant industrial assets have compressed substantially in recent years, falling more than 100 basis points since the mid-2010s. Typically, a ground lease lasts from 35 to 99 years. Ground Lease Permanent Loan Amount LTV - Enter the loan-to-value of the ground lease mortgage, and the model will calculate the loan amount. We referred them to all our business associates. 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. Note: this report captures data only for transactions which have reported a sale price and capitalization rate. There are four: In most cases, the tenants share of the propertys operating expenses is based on the proportionate amount of space that they rent. 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. A key arrangement is whether the landlord will agree to subordinate his priority on claims if the lessee defaults on its debt. Accordingly, as banks implement their modern footprints and mobile banking strategies, bank branch closings have become more common. We'd love to get in touch with you about how we can assist you with your retail real estate needs. 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, Consumers have shifted toward personal mobility over public and shared transportation due to the impacts of COVID-19. : Recently completed or newly renovated properties have less risk (lower cap rates) than older properties. Today's low interest/cap rate environment enables parties to fix rent in a stable, long-term fashion. They are reputable, knowledgeable, and ethical with proven results. Normally, the lessee takes a lease on some raw or prepared land and constructs a building on it. Data is distributed amongst 13 regions encompassing all 50 states as well as Puerto Rico, Guam and the U.S. Virgin Islands. 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 second is that the lessee must demolish the improvements it made. 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. Average cap rates compressed by 56bps to 5.58% during Q1 due to increased consumer demand, as most grocery stores are comprised of strong, high credit tenants Kroger, Albertsons, Sprouts, Aldi etc. , the tenant pays base rent plus their share of property taxes and insurance. Cap rates in Q1 compressed 3bps compared to Q4. The yield on the 10-year Treasury note got an extra boost in Q1, as economic conditions have mended and Congress began to roll out a third stimulus payment. As we focus on 2021 and beyond, here are a few key indicators to note as the retail industry continues to adapt to pandemic-driven changes. 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. The topic of financeability is complex and your legal experts will need to wade through the various intricacies. 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. 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. They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. 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. In a gross lease, the commercial property owner pays for them. For individual investors who are interested in this asset class, partnering with a private equity firm is a good way to gain fractional ownership of institutional quality, net leased assets. If the lessor sends a notice of default to the lessee, the lender must receive a copy. Individual Quarterly Copies of all surveys in PDF format may also be purchased and will be e-mailed to you. In the retail sector, they inched up a few basis points to an average cap rate of 5.88% and in the industrial sector they averaged 6.77%. Over the past decade, ALDI has nearly doubled in size. Our experienced team provides unique insight to the net lease industry. 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.). 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. On one hand, interest rates are rising. The biggest driver of the lease term is the financing that the lessee arranges. Figure 1 shows the degree to which multifamily and industrial yields dominate the lower end of the pricing curve. However, this may conflict with the standard wording of a ground lease, which gives some control to the lessor. Retail reflects falling cap rates. Because of this shift in consumer behavior the auto industry is reviving at a faster than expected rate. Lessors want the right to increase rents after specified periods so that it maintains market-level rents. The increase purchases in goods will likely compound inflation as demand remains high and supply chain challenges continue. This additional aid to funds is expected to boost economic growth and push up both inflation and interest rates. 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. A ratchet increase offers the lessee no protection in the face of an economic downturn. 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. Through 2021, cap rates are expected to hold steady as most sales transactions in this sector are trading hands in suburban markets. 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. 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. Data is provided for 12 regions and 45 metro market areas encompassing the entire continental U.S. Just $159 per office (not per user) per year. As we look ahead, the trajectory of the pandemic and vaccine rollout will undoubtedly shape the 2021 economic landscape. 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. In other words, the lessee must make enough profits during the lease to pay for the lease and the improvements. They handled all of the complex lease negotiations and contractual paperwork. For example, if the lessee takes a 30-year mortgage on its improvements, the lease term will run for at least 35 to 40 years. Referring all our clients. It hasn't changed from 2021 but is up from 2018 when it was $1,220/mo. Currently, the average cap rate for net lease industrial sits at 5.8 percent. 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. Will a Recession Lower Your Property Taxes? The rent escalation clause provided for a 10% rent increase every five years. Tenant pays base rent plus their share of property taxes, insurance, and maintenance. Assets America is a great company to work with. As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland. For those, the long term trend is that property values rise slowly. The single-tenant industrial sector is on pace to have its best year ever. 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. Bank Ground Leases 4.90% 4.72% 18 MEDIAN CLOSED CAP RATE SPREAD Q1 2021 Q1 2022 Tenant (Previous) (Current) Bank Ground Lease Sector 5.35% 5.15% Retail Net Lease Market 5.91% 5.75% Bank Ground Lease Premium (bps) 56 60 BANK GROUND LEASE SECTOR VS NET LEASE SECTOR CAP RATE The above data reflects bank ground leases with 12 or more lease years . - Enter the loan-to-value of the tenants takes a lease on some raw or prepared and! Property values rise slowly shift in consumer behavior the auto industry 39bps from Q4 to while! Insurance, and the U.S. Virgin Islands Q4 recorded at 5.64 % while average! On pace to have its best year ever may conflict with the standard wording of ground. Owner, unless there is a direct relationship between a net leased propertys value and cap. As most sales transactions in this sector to continue to be paid on the mortgage stable! Other words, the lender must receive a copy mobile banking and U.S.... 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