Millennials have disrupted the office sector with their preferences for open collaborative environments, but they are also disrupting the world of restaurants with their preferences for healthy food and more home delivery. As a result, investors in the net lease casual dining sector have grown a bit more cautious, and the most sought-after brands are the ones that have adjusted to the times.
Applebee’s is perhaps the best example of a chain that fell out of favor with its next generation of customers, and now has to make painful adjustments. The negative publicity has had an impact on investors. In the past year, cap rates for franchisee-operated Applebee’s increased 46 bps to 6.7%, according to a new report on the sector from the Boulder Group, a Wilmette, IL-based net lease firm. And the median rates for IHOP, another chain undergoing a struggle, increased 20 bps to 6.4%.
“The sector ultimately does not have a negative outlook, but some of the brands fell behind the times and did not keep up with demographic changes,” Randy Blankstein, president of Boulder, tells GlobeSt.com. And that also had an impact on how investors view the whole casual dining concept.
Overall, casual dining properties with corporately guaranteed leases now generate cap rates of 5.90%, while franchisee leased properties were priced at 6.50%, according to Boulder’s survey. That represents increases of 15 and 25 bps respectively over the past year.
Many brands got the message and began instituting changes, including more healthy dining options and efficient home delivery services. Denny’s, for example, which has updated many stores, still generates cap rates of 5.7%. And as the sector is largely impervious to e-commerce, Blankstein expects it will remain popular with investors.
“Restaurants are very difficult to replace, and you still need the physical location even if there is delivery,” he says.
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