Quick-Service Restaurants: Serving Up Opportunity

August 15, 2024 – Austin, TX | In 2022, as the restrictions from COVID pandemic waned, investors acted with a renewed sense of energy and optimism. A flood of new capital hit the markets pushing cap rates down to historic lows for all types of credit. This unprecedented situation saw bidding wars within hours of a property hitting the market, giving sellers a unique opportunity to maximize the value of their Quick Service Restaurant (QSR) properties. However, this ideal phase for sellers was short-lived. In 2023, stronger credit and corporate QSR brands achieved higher values, driving cap rates up for franchise credit deals. Combined with rising interest rates, this created the current market conditions. Overall sales volumes declined after peaking in 2022, and the sale-to-asking price gap widened as buyers’ and sellers’ expectations remained fixed.

The market has since softened, and cap rates have started to level off. At the height of it last year, franchise credit deals were being sold near a 5.70% cap rate, but this year they have risen 150-200 basis points. On a positive note, the average transaction timeline is beginning to level out. In 2022, it took an average of 3.75 months to complete a deal. By 2023, this had risen to more than 5 months. It is now normalizing, but the trend has slowed, and we are holding steady. Driven by the acceleration of trends during the pandemic, successful QSR properties have physically evolved over the last 3 years. Pragmatic decisions during the pandemic laid the foundation for ongoing adaptations to meet changing customer needs. Two main drivers of change to physical locations are the reduction in staff during the pandemic and the continuing rise of digital ordering.

Today, QSR properties offer owner-operators an opportunity to unlock equity through a sale leaseback transaction, likely offering more favorable conditions than a bank loan. The unrealized capital can be used to service expensive debt, remodel existing stores, expand or acquire new stores, and diversify the portfolio. QSR remains a dependable and reliable segment to invest in, demonstrating resilience and adaptability during economic downturns.

When evaluating specific properties, real estate fundamentals play a crucial role. Modern QSR properties have evolved with smaller footprints due to reduced demand for staff and dine-in areas. They have improved third-party delivery pick-ups to avoid bottlenecks, introduced customer collection areas and drive-thru’s for online orders, and added in-store kiosks for online ordering and payment. The sector offers security through long-term leases, a steady revenue stream, and tax advantages via a 1031 Exchange.

Three key factors create a great QSR deal: strong real estate fundamentals, the brand’s strength/business health, and the buyer and seller agreeing on a fair market rate. Due diligence is crucial, involving location assessment, lease structure, tenant financial performance, and current market dynamics.

The QSR space is recession-resistant and has always had some of the highest transaction volumes in the net lease sector. Today, tier-one brands are growing, tenants remain resilient and developers are adapting to the new market reality. These investments are still uniquely positioned to maximize yield and offer long-term security for years to come.

The SIG takeaway is that it’s a great time to be a buyer. Cap rates have risen, inventory has leveled out due to slowed construction, and more information is available to investors as the market matures. Don’t sit on the sidelines — adapt to the new market reality and seize opportunities, just like successful QSR businesses.

Will Schuhmacher is an Investment Sales Advisor at Sands Investment Group (SIG).

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See the article here as published in Wealth Management 2024 Market Outlook.