Jon Hipp
We recently pointed out that, while the net lease sector consists of commercial properties involving specific lease arrangements, the tenants and their industry sectors are different. One very good example involves comparisons between auto supply retailers and banking centers. These sectors are similar from a net-lease perspective, in that they are often found in stand-alone buildings that are easily accessible, offer high visibility and allow the lessee to control brand identity through signage and layout.
But these tenants are also different when it comes to product and service offerings. As such, net lease investors should understand industry trends and issues before putting money into these properties.
Driving to an Auto Parts Explanation
The average price of automotive property, specifically auto part stores, is around $1.6M, with the average cap rate hovering around 6.25%
The auto parts niche is made up of a few main brands: AutoZone, Advance Auto Parts, O'Reilly Auto Parts, and NAPA Auto Parts. Auto parts retailers have physical layouts similar to other retailers; from a landlord perspective, these are easier to re-tenant. With this in mind, it adds extra value for the property owner as they are not locked into being able to host a group of particular tenants. Fast food restaurants, retailers, and even banks are examples of who to take over for a vacated auto part retailer.
Accounting for Banking Centers
Banking centers, also known as branch banks, are leased by financial institutions in an effort to be closer to customers. Bank of America, Chase, CitiBank and Wells Fargo branches can be found nationwide. Regional and local banks also occupy these facilities, many of which offer drive-through, ATM and teller services. Sector cap rates average 5.9%, while the average investment acquisition price point is $2.9 million.
On the plus side, banking centers are in high-traffic locations with plenty of visibility. But the industry itself is heavily regulated. As such, the landlord needs to ensure that the tenant isn't violating state or federal laws and rules, or else said landlord could be stuck with an empty building.
More Differences
Products and services aren't the only differences between automotive and banking center tenants. Here are some others.
Recession resistance. Auto parts stores, specifically on the retail side, are, to an extent, considered recession-proof. In an economic downturn, people are more likely to manage minor repairs and oil changes themselves. This, incidentally, can cut into the income of Jiffy Lube and Firestone centers, though as cars are becoming more technologically sophisticated, self-repairs are becoming more challenging. Banks are not recession-proof.
Corporate versus franchisee. Banking center tenants, more often than not, are backed by national, credit-worthy corporations. If a branch closes down, the lease will remain in play, giving the investor more time to re-tenant the space. Auto parts and repair centers can be operated by credit-worthy corporate entities. Before investing in these facilities, investors should understand what entity is backing the tenant. A tenant backed by a lower-credit franchisee means more risk.
Industry trends. Put simply, banking is volatile. These days, customers are migrating to online banking, meaning a reduction in banking centers. Branch expansion has been limited, with the current property supply saturated with leases averaging less than 10 years. The automotive parts sector? Not quite as volatile as banking and is, for the most part, in expansion mode. Once again, we say that there is more to successful net lease investing than sales price, cap rate and NOI. Because net lease properties have a variety of functions, investors need to ensure they understand the industries operating in these properties to generate an ideal rate of return.
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Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
