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Casual Dining Sector Was Softening Even Before The Pandemic

Applebee's,_Coral_Springs
An Applebee's in Coral Springs, Fla.

Net lease transactions in the casual dining sector were mostly put on hold by the coronavirus crisis, as tenants switched to carryout and delivery and sales volumes dropped significantly. But even before that, investors had begun to look skeptically on several brands seen as not keeping up with consumers’ changing tastes.

That pushed up overall cap rates in the single-tenant casual dining sector, which increased in the first quarter — almost entirely before the pandemic took hold — to 6.59%, according to a new report from The Boulder Group. That is a 27-point increase from rates one year ago.

“The casual dining sector is currently priced at a discount to the overall net lease retail market due to some weaknesses within the casual dining space,” Boulder Group partner Jimmy Goodman said. “Casual dining properties were priced at a 44-basis point discount to the overall net lease retail market.”

Brands such as Ruby Tuesday, Red Robin and Golden Corral may need updates to keep up with shifting consumer preferences, he added. Applebee’s posted a 25-basis point cap rate increase in the past year, according to Boulder’s study, although Restaurant Business reports it has been successful in developing curbside services after the pandemic shut down inside dining.

Over the rest of 2020, investors in the sector will seek out restaurants that can successfully navigate how to survive with the many new restrictions put on dining.

“Casual dining tenants will need to prove to net lease investors a sales trajectory of pre-COVID levels in order for transaction velocity to begin again,” Boulder Group Senior Vice President John Feeney said.