Quick Service Restaurants: Why is this Segment Wildly Outperforming the Broader Net Lease Market?

In today’s commercial real estate market, where turbulence has become the norm, we have observed a particularly strong performance in one segment of the net lease sector: quick service restaurants (QSRs). As we market net lease QSR properties, we’ve seen firsthand how this asset class has thrived despite broader challenges. To put this in context, net lease retail inventory has expanded significantly, growing from $9 billion just two years ago to over $24 billion today. However, QSR assets have outperformed expectations and outpaced many other categories within the space.

While rising interest rates, inflationary pressures and reduced demand have caused ripples throughout much of the real estate sector, QSR properties have remained remarkably resilient. In fact, they are now some of the most sought-after assets for private investors, particularly those seeking reliable cash flow in an otherwise uncertain financial environment. Over the past year, we’ve consistently seen high demand for QSRs, and the reason for this success reveals a great deal about what’s happening in the market right now.

Data shows that cap rates for QSR assets have remained relatively stable, hovering between 5% and 6% – depending upon credit – even as cap rates for other retail segments have inched higher. This demonstrates the strong investor appetite for these properties. Furthermore, we’ve noticed that well-located QSR assets with corporate-backed leases are attracting multiple offers, often driving prices higher than initial asking. These trends reflect how investors view QSRs as a defensive play, capable of generating stable returns even amid broader economic headwinds. This is borne out by the fact that the QSR market has seen relatively stable closed deal flow over the past five years.

Small Price Points and Less Reliance on Financing

A major reason QSR properties are outshining other segments is their small price point, which has made them more approachable for private investors. With financing costs skyrocketing, larger transactions in the net lease space are increasingly difficult to finance without generating negative leverage. The math simply doesn’t work when borrowing costs exceed the cap rate of the asset, which is a common challenge right now. With assets that largely require debt, we are regularly seeing 7%+ cap rate trades.

However, QSR properties often fall into the sweet spot for private investors with available cash. Since these properties are priced more modestly, they don’t require the same kind of financing that would burden larger deals. In essence, QSR properties are more accessible to investors who can avoid the headaches of financing altogether. And for those who do need to borrow, the smaller loan size can occasionally still make sense, keeping this segment competitive despite the overall cost of capital.

Reduced Dependence on 1031 Exchange Investors

Another factor contributing to the QSR sector’s success is its reduced dependence on 1031 exchange investors. In today’s market, fewer large 1031 exchanges are taking place, which has impacted other parts of the net lease sector. Larger transactions, which often rely on 1031 exchange-driven demand and a purchaser who feels comfortable placing “multiple eggs in one basket” have slowed significantly, as these investors navigate a trickier environment for finding replacement properties.

However, with their lower price points, QSRs have proven less vulnerable to this slowdown. These assets are still attractive to the private investor base, many of whom are not reliant on 1031 exchanges. Furthermore, the smaller transactions that do involve 1031 exchanges are still flowing, as investors can turn to QSR properties as viable, manageable options to complete their exchanges. This dynamic keeps demand for these assets relatively strong compared to larger, more complex deals.

Many QSR properties are being purchased with 20-year primary lease terms, where future valuation is somewhat mitigated even with lease term decay because of the small delta between 15- and 20-year cap rate values. Investors feel comfortable with QSRs because they offer very long lease terms and reliable ease of ownership – most are true or absolute triple net and therefore have no landlord responsibility.

Insulation from Online Retail Competition

One of the most compelling aspects of QSR assets is their resilience against the e-commerce threat that’s impacting many traditional retail sectors. While much of the retail world has had to contend with the dominance of online retail, QSR properties stand apart. You can’t get a fresh, hot burrito delivered via Amazon, and that’s a major comfort for investors.

Quick service restaurants thrive on the in-person experience. Whether it's grabbing a coffee on the go, ordering a burger at the drive-thru or picking up a taco in-store, QSR tenants are less susceptible to being overtaken by online competition. This makes them far more defensible in the eyes of investors who are seeking real estate that will stand the test of time in the rapidly changing retail landscape. The combination of in-person dining and drive-thru convenience provides a unique level of protection that other retail assets can’t offer.

Prime Real Estate and Transparency

Another significant advantage of QSR properties is the underlying real estate itself. These assets often occupy prime locations, typically at high-traffic, hard-corner intersections with excellent visibility. They also typically are found in front of major big-box gold-standard retail traffic drivers like Home Depot, Walmart, Target and national grocery store chains. This is real estate that will always have inherent value. Even if a particular tenant were to leave, the location would remain attractive for another operator or brand due to its accessibility and visibility. Furthermore, QSR assets have likely gone through a local municipal zoning process to obtain approval for the drive thru. This process is often tedious and time consuming, whereby the “as of right” zoning already in place creates underlying value for the building owner by being able to provide a drive-thru to a tenant without a long lead time or hurdle.

In addition to strong real estate fundamentals, QSR properties offer investors transparency that is often lacking in other net lease assets. Investors can usually gain access to unit-level performance metrics, which allows them to better understand how a specific location is performing. Whether it's seeing consistent growth in sales or getting insights into corporate financials, this added layer of transparency can reduce investor uncertainty and make these deals even more attractive.

For corporate-backed QSR leases, the additional security provided by a strong national brand adds to the appeal. When you combine corporate guarantees with the favorable real estate characteristics of these properties, the result is an investment that ticks a lot of boxes for both institutional and private investors alike.

Why QSRs are Defying Market Trends

In a market that’s been rocked by rising interest rates, financing challenges and changes in investor behavior, QSR properties have emerged as a standout success story. Their smaller price point, insulation from e-commerce competition and excellent underlying real estate fundamentals have made them incredibly attractive to private investors who are increasingly avoiding larger, riskier transactions. The ability to access unit-level data and corporate-backed leases only adds to the sector's appeal, creating a compelling case for continued investment in the QSR space.

As the broader market continues to face headwinds, the resilience of QSR properties offers a valuable lesson. Investors who can pivot and adapt to the current market dynamics are likely to find themselves better positioned for long-term success, and QSR properties are proving to be a reliable anchor in these uncertain times.