CHICAGO—The long-term slide of cap rates for single tenant net lease properties began to reverse within the past year or so, and that's especially true of the big box sector. Cap rates for these properties increased by 25 bps to 6.75% from the fourth quarter of 2016 to the fourth quarter of 2017, according to a new report from the Boulder Group, a net lease firm in suburban Chicago.
The firm attributes that rise “to investor concern about the evolving square footage demands for big box retailers.” E-commerce has been forcing many stores to change how they serve customers, and that usually means shrinking. For example, Kohl's recently decided to decrease its stores' footprints and bolster digital offerings.
That concern from investors means tenant credit plays a big role in investor demand, Boulder adds. “Big box properties leased to investment grade properties were priced at a 33 bp premium over non-investment grade properties,” more than double the prior year. Investors also remain concerned about the backfill potential of big box properties. “The re-leasing costs associated with big box properties tend to be higher due to required tenant improvement allowances and the possibility of dividing space for multiple smaller tenants in the future.”
The spread between net lease big box properties and cap rates for the overall net lease retail market also continues to widen, Boulder finds. In the fourth quarter of 2017, big box properties were priced at a 68 bp discount to the overall net lease retail market, up from 31 bps the prior year. Furthermore, their high price points limit the size of the buyer pool. The median asking price for net lease big box properties was $8.9 million in the fourth quarter of 2017.
But Boulder expects buyers seeking higher yields will remain active in the big box sector. However, these investors will also carefully evaluate alternative uses the properties can achieve. Additionally, “investors will carefully monitor retailer's store prototypes, especially as it relates to square footage as retailers continually shift the size of their stores.”
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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.
