What Cap Rate Is Good for a NNN Investment? Benchmarks by Tenant Credit

Defining 'Good' in the NNN Asset Class In the triple-net (NNN) investment landscape, the term 'good' is relative and must be calculated through the lens of risk-adjusted yield. A 7.00% cap rate on a secondary market industrial asset may be a poor investment if the tenant lacks credit strength, while a 5.25% cap rate for a long-term ground lease with an investment-grade (IG) tenant may represent an exceptional preservation of capital. To determine an appropriate benchmark, investors must analyze three primary pillars: the creditworthiness of the tenant, the remaining lease term, and the intrinsic value of the underlying real estate. As of the current market cycle, the delta between 'A' rated corporate credit and high-performing franchise operators can exceed 200 basis points. Benchmarks Based on Tenant Credit Ratings Credit ratings from agencies like S&P Global and Moody’s serve as the primary proxy for default risk. Lower risk equates to lower cap rates (higher prices), as institutional capital seeks safety during economic volatility. Investment-Grade (IG) Tenants (S&P BBB- and higher) These assets are the gold standard for 1031 exchange investors. Tenants such as Walmart, CVS, Chase Bank, and 7-Eleven represent the lowest risk profile. * Cap Rate Range: 4.75% to 5.75% * Risk Profile: Extremely low. Default risk is negligible, making these 'bond-substitutes.' * Lease Structure: Typically absolute NNN with 10-20 years of initial term. Non-Investment Grade / Strong Private Credit This category includes successful national retailers that either lack a formal rating or sit just below the IG threshold. Examples often include larger franchisees of brands like Taco Bell or Wendy’s, as well as companies like Dollar Tree (which has fluctuated between IG and sub-IG). * Cap Rate Range: 5.75% to 6.75% * Risk Profile: Moderate. While the corporate entity is stable, investors require higher yield to compensate for the higher probability of localized store closures or corporate restructuring. Franchisees and Local Operators Investing in a single-unit operator or a small regional franchisee requires deep due diligence into the tenant's individual Profit and Loss (P&L) statements and unit-level health. * Cap Rate Range: 6.75% to 8.50%+ * Risk Profile: Higher. The lease is only as strong as the specific operator. Investors should look for a Lease Coverage Ratio (LCR) of 2.0x or higher to justify the investment. | Tenant Class | Typical Cap Rate Range | Sample Tenants | Key Value Driver | | :--- | :--- | :--- | :--- | | Investment Grade (Tier 1) | 4.75% - 5.50% | McDonald's, Wawa, Chick-fil-A | Corporate Guarantee | | Investment Grade (Tier 2) | 5.50% - 6.00% | Walgreens, Advance Auto Parts | Market Dominance | | Specialized Medical | 6.00% - 7.00% | Fresenius, DaVita | High Switching Costs | | National Franchisees | 6.50% - 7.50% | Pizza Hut, Burger King | Unit-Level Sales | The Impact of Lease Term on Yield Cap rates do not exist in a vacuum; they are heavily influenced by the remaining primary lease term. A CVS with four years remaining on a lease will trade at a significantly higher cap rate (perhaps 7.00%) compared to the same CVS with 20 years remaining (5.25%). This 'term premium' exists because the investor faces the imminent capital expenditure (CapEx) or vacancy risk associated with a renewal or re-tenanting event. For 1031 exchangers, the sweet spot is often found in the 10-to-15-year range. This provides enough runway for debt amortization while still offering a secondary market exit if they choose to trade up before the lease becomes 'short-term' (less than 7 years). Market Geography and Residual Value The physical location remains a critical component of the cap rate equation. An absolute NNN asset in a 'zero-income-tax' state (Florida, Texas, Tennessee) will often command a 25-50 basis point premium (lower cap rate) due to the tax efficiency for the landlord and the generally favorable demographic trends. Investors must also eval…