Randy Blankstein, president, The Boulder Group, Wilmette, IL
WILMETTE, IL—Cap rates in the single tenant net lease big box sector increased by 29 basis points, to 7.04% from the fourth quarter of 2017 to the fourth quarter of 2018, according to The Boulder Group, a Wilmette, IL-based boutique investment firm specializing in single tenant net lease properties.
Boulder says the rise in cap rates is mainly due to investor concern about the evolving retail environment, store footprints for big box retailers and the cost associated with filling big box properties.
Over the past year, tenant bankruptcies and store closures due to the struggles or failures of well-known retailers including Toys R Us, Orchard Supply (Lowe's), Sears/Kmart and Shopko led to increased vacancy in the sector.
Cap rates for the sector increased more than the overall net lease retail sector, Boulder Group says. In the fourth quarter of 2018, net lease big box properties were priced at a 79-basis-point discount to the overall net lease market, an 11-basis-point increase from the prior year. Regionally, median cap rates are the lowest in the west, at 6.29%, and highest in the Midwest, at 7.4%. Median cap rates in the Northeast were 7.25%, and 7.06% in the South.
Big box properties in primary retail corridors with strong real estate fundamentals remain in demand among institutional investors and large 1031 exchange buyers, even with the troubles facing non-credit tenants within the big box retail space, Boulder's report says. An investment grade property would command a median asking price of $176 per square foot, vs. $141 per square foot for a non-investment grade property, Boulder says.
Notable transactions in the fourth quarter were the $25.921 million Safeway deal in Olney, MD in November, at a price of $434 per square foot, at a 5.78% cap rate with 19 years remaining in the lease; an October deal involving Mariano's in Crystal Lake, IL, for $25.2 million, or $337 per square foot, at a 5.88% cap rate with 20 years left; and the Mount Vernon, NY, Stop & Shop, at $22.25 million, or $276 per square foot, at a 6.98% cap rate, with five years remaining on the lease.
Expanding retailers including Burlington, TJ Maxx/HomeGoods and Hobby Lobby and real estate investors were quick to acquire or lease the more desirable real estate vacancies left behind by retailer bankruptcies in 2018. Transaction volume in the net lease big box sector in 2018 reflected a similar pace to 2017.
Income investors are more sensitive to tenant quality and financial health in the net lease big box sector. Investment grade tenants including Walmart, Costco, Whole Foods and others get a significant premium over non-investment grade users, according to Boulder's research. In the fourth quarter of 2018, investment grade tenants in the big box sector were commanding a 68-basis point premium. This is more than double the premium associated with this category one year earlier.
The single tenant net lease big box sector will remain active, Boulder says. Both individual and institutional investors are looking for net leased properties to meet acquisition targets and for 1031 exchanges. With yields higher than the overall net lease retail sector, many investors will be targeting assets with strong real estate fundamental after careful underwriting and understanding of local retail markets.
However, Boulder cautions, big box properties with issues related to tenant health and financial strength and properties with irreplaceable rents or tertiary locations will be in less demand.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Steve Lubetkin
Steve Lubetkin is the New Jersey and Philadelphia editor for GlobeSt.com. He is currently filling in covering Chicago and Midwest markets until a new permanent editor is named. He previously filled in covering Atlanta. Steve’s journalism background includes print and broadcast reporting for NJ news organizations. His audio and video work for GlobeSt.com has been honored by the Garden State Journalists Association, and he has also been recognized for video by the New Jersey Chapter of the Society of Professional Journalists. He has produced audio podcasts on CRE topics for the NAR Commercial Division and the CCIM Institute. Steve has also served (from August 2017 to March 2018) as national broadcast news correspondent for CEOReport.com, a news website focused on practical advice for senior executives in small- and medium-sized companies. Steve also reports on-camera and covers conferences for NJSpotlight.com, a public policy news coverage website focused on New Jersey government and industry; and for clients of StateBroadcastNews.com, a division of The Lubetkin Media Companies LLC. Steve has been the computer columnist for the Jewish Community Voice of Southern New Jersey, since 1996. Steve is co-author, with Toronto-based podcasting pioneer Donna Papacosta, of the book, The Business of Podcasting: How to Take Your Podcasting Passion from the Personal to the Professional. You can email Steve at [email protected].
