Asking Cap Rates for Auto Sector Decrease

In the fourth quarter, national asking cap rates in the single-tenant auto sector decreased 48 basis points to 5.89%, according to the 2020 Net Lease Auto Report from The Boulder Group.

New construction with longer-term leases drove the cap rate decline in the auto sector, consisting of various auto-related tenants in the parts, service and collision sectors. New development is primarily concentrated in the service and collision sectors where major tenants, such as Caliber Collision, continue to expand their footprints nationally.

“These guys are all expanding because they think they can take market share from the local shops,” says Randy Blankstein, president of The Boulder Group.

In the fourth quarter of 2020, the median term remaining in the auto parts sector was less than eight years. For service and collision sectors, the median term remaining lease term was approximately 12 years, according to The Boulder Group.

Overall, the auto sector commanded an 11-basis point premium over the overall net lease retail sector in Q4 2020. In the fourth quarter of 2019, the auto sector was inversely priced at a 30-basis point discount.

Overall, auto service represented 50% of the properties on the market, while auto parts was at 33% and collision was 17%. Auto parts stores saw a 54-basis point cap rate decline. That was followed by auto service (-50 basis point change) and collision centers (32% basis point change).

The smaller price points in the sector also create a larger buyer pool, according to The Boulder Group. In the fourth quarter of 2020, the median asking price for the auto sector was approximately $2 million.

Traditionally, the service and collision sectors have been underweighted in investors’ portfolios, but that is changing.

While much of the economy shut down in 2020, investors saw that demand for collision service wasn’t really affected by COVID, according to Blankstein.

“It’s a necessary service,” Blankstein says. “If you get into an accident, that is something that can’t be delayed. Usually, when investors are in the auto sector, they’re in auto parts, like Advanced Auto Parts, O’Reilly Auto Parts and AutoZone. But those guys expansions whittled down.”

Blankstein expects transaction volume in the auto sector to be similar to 2020, with investors continuing to chase properties with strong tenants. He sees increased competition for new construction assets as 1031 and private investors favor these properties.

Even properties with shorter lease terms should attract demand.

“Auto properties with shorter lease terms located in areas with strong real estate fundamentals also remain in strong demand among buyers seeking higher yields,” he says.