Why are fast casual dining restaurants becoming more popular with investors? Lowering their risk may be the key factor.
Sit-down, full-service restaurant chains continue to face pressure from fast-casual competitors, and not just in the competition to woo diners.
Investors also appear to be losing some of their appetite for real estate leased to the national “casual dining” chains such as Hooters, Red Lobster, Chili’s.
Cap rates jumped to 6.32% in the first quarter for so-called “net lease” properties tied to casual dining restaurants, up 6.05% from a year ago.
Net lease properties involve leases in which the landlord has little to no responsibility for managing the real estate beyond collecting a rent check.
An increasing cap rate can reflect the greater risk that a tenant might struggle or fail to renew at the end of its lease.
Many investors looking for lower risk have targeted fast-casual properties, or restaurants that typically do not offer table service.
The number of casual dining restaurants for sale rose more than 30% above last year.
The surge in supply comes as some restaurant chains look to become more “asset light” by selling properties they can lease back from the buyer.
Some institutional investors have been shedding casual dining restaurants as the sector sees sales shifting to fast-casual places.
The Boulder Group reported that investors have taken note of struggles by big names such as Applebee’s and Red Lobster.
Applebee's second-largest franchisee filed for bankruptcy protection last year.
Red Lobster saw the biggest bump in cap rates among corporate-backed leases in the first quarter.
VEREIT, an institutional investor, sold 2 Red Lobster’s in April. One in Indiana for just under $3.2 million with a 6.25% cap rate and one in Georgia for $3.2 million with the same yield. It sat on the market for seven months.
The buyers of such properties are typically investors willing to accept more risk in hopes of a higher reward.