Over the years Restaurants For Sale Online has listed tens thousands of restaurant, bar and nightclubs. There are a number of trends that have been observed in the overall real estate market, but the major trend is in commercial and retail real estate which would include restaurant real estate. Capitalization rates in 2005 have fallen from a typical range of 10% to 12% to as low as 5% to 8% in many markets. We have seen a resurgence of this in 2013.
The last 12 months has been a very boisterous real estate transaction market as interest rates have remained relatively low and there has been a lot of commercial transactions. Does it make any sense that although office vacancy has stayed relatively the same is markets such as San Francisco, yet values have increased by 200% in some cases? The real estate market is really out of control and if you are a restaurant real estate owner, 2005 is probably just the right time for you to sell that real estate and cash in on the extra value that may be present in your local market.
Here is an example change in valuation which may be observed in boisterous markets in the recent year.
Scenario: Owner owns real estate and leases out space
Lease Type: NNN (Triple Net)
Property Size: 3,000 Square Foot Property
Yearly Rent: $54,000 ($1.50/sq. ft. per month)
Cap Rate Prior to Boom: 10%
Cap Rate 2005: 6%
Value Prior to Boom:
$54,000 / 10% = $540,000
$54,000 / 6.0% = $900,000
Example Added Value:
Added Value For Selling in 2005: $360,000 (+66%)
Capitalization rates have little room to decline at this point as interest rates are likely to rise over the next two years which will make lending more expensive and thus drive prices back down.
Three things for restaurant real estate owners to consider in the valuation process:
1) What are comparable sales and listings in your market?
Talk to local commercial real estate agents and business brokers who may be familiar with retail and restaurant real estate transactions. Look for properties that have sold of similar size. Also, a good broker/agent should know what local cap rates are for your market and can give you an idea of how they have changed locally and if now is a good time to sell in your market.
2) Where you are going to put your money if you sell?
If you are going to sell your restaurant real estate now, keep in mind if you are trying to do a 1031 exchange, a good deal may be harder to come by right now as things in general are overvalued. Talk to your financial advisor about creative ways in investing your money to avoid overpaying for a piece of real estate and to avoid paying a large capital gains tax. You can almost always can find a good real estate deal to transfer into if you spend some time.
3) What are alternative development options at the location?
You may not realize it, but your property can be sitting on a gold mind. Talk to the county and city to see what zoning you are in and if alternative developments may be developed on your site. Your property may have more upside for development in commercial zones which may allow for development of hotels, office buildings, or just expansion of your existing real estate. Lending institutions have been eager to lend on these type of expansions and now is the time to lock into cheaper money before interest rates rise again.