CHICAGO—The cap rates for net leased properties in the auto parts sector sank to historic lows about one year ago, and throughout 2014, those low rates have largely remained steady, according to a new report by the Boulder Group, a net lease firm in suburban Chicago. Rates in the sector went from 6.22% in the fourth quarter of 2013 to 6.25% by the end of last year.
“We were not surprised by the continued demand as average car age continues to rise despite the recession being over,” Randy Blankstein, president of Boulder, tells GlobeSt.com. According to a recent report by R.L. Polk & Co. and IHS Automotive, the average age of vehicles on the road has increased to 11.5 years. In addition, the researchers expect that the number of vehicles over 12 years old will increase 15% by 2019.
For its study, Boulder surveyed deals involving Advance Auto Parts, Auto Zone and O'Reilly Auto Parts because these three accounted for the highest percentage of transactions involving auto parts tenants. The gap between these leaders in the auto parts sector and the overall single tenant net lease retail market narrowed considerably over the last year. The cap rate for the latter sank from 6.85% to 6.5%, shrinking the gap from 63 bps to 25 bps. Blankstein attributes this to “the increased supply of vintage properties with shorter-term leases.”
In the fourth quarter of 2014, Advance Auto Parts properties with less than 10 years remaining on their leases made up 69% of all Advance Auto Parts properties on the market. The company, the largest auto parts retailer in North America, accounted for 59% of the stores on the market. Last January, it completed its $2 billion all-cash acquisition of General Parts International, which includes the Carquest and Worldpac brands.
Demand for auto parts properties also remains high since aside from dollar stores, the net lease market has few investment grade options priced below $2 million. In addition, owners can easily re-tenant auto parts, many of which are constructed as vanilla boxes, in the event a tenant vacates.
Auto parts retailers continue to expand, opening more than 500 stores in 2014, roughly similar to the pace in 2013. Despite the 500 new store openings, new construction only made up 21% of the sector. “This can best be attributed to the fact that the auto part retailers own an increasingly high percentage of their locations,” the new Boulder report notes. “Furthermore, owners of properties with shorter term leases have added supply to the market to take advantage of the low cap rate environment as the consensus of net lease participants believe that the market strongly favors sellers.”
“We do not see any changes in demand in the upcoming year,” Blankstein adds. Transaction volume should remain strong due to the industry's solid fundamentals. “Recently constructed properties with long-term leases should continue to be in the highest demand as these assets are the most sought after amongst 1031 buyers due to their lower absolute price point.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
