Swiftly, Fast-Food Establishments and Convenience Shops Display Promising Potential in Real Estate Ventures
In October 2024, Oxford Economics suggested a "window of opportunity" for investing in commercial real estate (CRE). The opinion was that the following 12 to 18 months, approximately until 2025, would present the best opportunity for direct real estate investment during this cycle.
Oxford Economics identified Europe and the industrial CRE segment as promising markets globally. However, in the U.S., data indicated two promising sectors within retail: fast food (commonly referred to as quick-serve restaurants or QSR) and convenience stores (C-stores).
The phrase "location, location, location" is often misunderstood by property owners and investors. A good location implies the proper balance of supply and demand, which may vary between commercial tenants and owners, particularly regarding retail.
Location involves a place that customers will visit for goods or services. The site also must provide the necessary physical facilities and infrastructure for the business. Tenants aim for a favorable combination of factors, along with high building vacancies, which provide an advantage in negotiations with landlords to lower rents. Landlords, on the other hand, desire low vacancies to maintain leverage during rent setting.
Brokerage Markus & Millichap's Q4 2024 retail report presented a graph showing limited vacancy across various property types. Convenience stores and fast food had the lowest vacancies (below 2%). Other retail categories had vacancies significantly above 2%.
Performances of fast food and convenience stores
QSR and C-stores have excelled. According to a Pacer.ai report from April, C-stores were transforming into go-to destinations through dining, shopping, and tourism offerings, resulting in continuous year-over-year growth that surpassed overall retail trends.
Pacer.ai stated, "Convenience stores are thriving, transforming into some of the most exciting dining and tourist destinations in the country." Today, C-store customers can anticipate menu items like brisket sandwiches or craft beers rather than the typical stale coffee cups. The data suggests that customers welcome these innovations and contribute to the segment's success.
The Wall Street Journal reported, "The industry is so fragmented in the U.S. that the 10 largest chains hold less than a fifth of the market share." Greater fragmentation allows for less control by large chains, diminishing their negotiating power.
Marcus & Millichap suggested that retail deal flow (number of locations bought and sold) decreased yearly during the first eight months of 2024. However, the number of fast-food-related trades increased. The report stated, "The segment's scant vacancy and number of chains in expansion mode are encouraging investor competition for properties net-leased to these tenants."
Good yields versus risk-free returns
Consumer demand for convenience stores and fast food supports the industry's requirement for more space. Retail yields are "well situated relative to the risk-free rate in many markets and rental growth has reemerged in some markets after a prolonged absence," Oxford said.
Translated: retail building ownership provides returns higher than those offered by Treasury instruments like the 10-year, which is essentially considered a risk-free return in investments. These investments may not be perpetual. On December 27, 2024, the yield on the 10-year Treasury reached 4.62%. Previously, it had only reached that level in April 2024, and many economists expect the 10-year yield to rise significantly higher, increasing commercial mortgage interest rates and the required rents to ensure a property's profitability. Higher costs can negatively impact demand, and large economic shifts could make retail property dynamics uncertain. This underscores Oxford Economics' original point that the best time to invest in CRE is probably now.
Based on the current market trends, investing in 's-stores' (convenience stores) and 'QSR' (quick-service restaurants) within commercial real estate (CRE) could be a wise decision. The Pacer.ai report has shown continuous year-over-year growth in C-stores, surpassing overall retail trends, making them promising sectors for direct real estate investment. Additionally, the Wall Street Journal highlights the fragmented nature of the fast food industry in the U.S., reducing the negotiating power of large chains and creating opportunities for smaller investors. Furthermore, the good yields from retail properties, such as those housing convenience stores and fast food chains, are often higher than risk-free returns from Treasury instruments, making them an attractive investment option.
