Single Tenant Auto Properties Compress Amid Increasing Demand

A market dominated by auto parts retailers, the single-tenant auto sector’s national asking cap rates decreased to 5.40% in Q4, according to The Boulder Group’s 2021 Net Lease Auto Report.

This represented a 49-basis point increase when compared to the prior year.

Overall market conditions in the net lease sector and increased demand were the primary contributors to the cap rates’ decrease, said Randy Blankstein, president, The Boulder Group.

According to the report, in comparison, the net lease retail sector experienced cap rate compression resulting in a 12-basis point decline over the course of 2021.

Supply in the net lease auto sector primarily consists of auto parts retailers, added Jimmy Goodman, partner, The Boulder Group. In the fourth quarter, auto parts retailers made up 49% of the property supply, he said.

It’s a “Safe Sector” to Be In

Jason Long, Stan Johnson Company Associate Director who has a deep track record of auto sector sales, tells GlobeSt.com that even post-pandemic, buyers are still actively seeking out essential retailers, so the automotive sector remains strong and in high demand. 

“A lot of investors feel safe in this sector, and there are options that appeal to a wide range of buyers. For investors new to net lease, there are low price point deals to be had, and we’ve seen significant growth with tenants like Take 5 Oil Change. 

“Just in the past six months, we’ve tracked more than 30 of these deals that are selling between $1 million and $2 million. But the auto sector has quite a few tenants that structure their leases in a double net fashion, and that can be intimidating to new investors. 

“For tenants like Advance Auto Parts or O’Reilly that typically operate on double net leases, repeat owners are used to that expense responsibility and continue to pursue these opportunities due to the strength of credit and great locations.”

Will Wamble, Vice President, SRS Real Estate Partners National Net Lease Group, tells GlobeSt.com that, for the most part, the large national auto parts retailers have great credit, offering more long-term stability in the tenancy than some of the alternative net leased investment options.

“Given the lack of supply of credit single-tenant retail and the amount of liquidity still in the marketplace, we expect the cap rates to remain at historic lows for the major tenants in this space.

“Another big driver is that a lot of these leases are also set up as fee simple vs. ground lease which allows the buyer to depreciate the asset.”

Average Vehicle Age: 12 Years

According to IHS Markit, the typical age of a vehicle on the road is more than 12 years old—representing an all-time high.

Transaction volume in the auto sector should remain similar to 2021 as investors continue to seek properties with strong tenants in the price range this sector provides, Blankstein said.

“Competition for new construction properties with long term leases will remain, especially amongst 1031 investors,” Blankstein said. “The net lease auto sector will garner investor interest ranging from private investors to institutional/REIT investors.”

Average Remaining Lease Term for Auto Parts Sector Less than Nine Years

Development and tenant expansion in this category lagged historical standards which led to an average remaining lease term of less than nine years for the auto parts sub-sector.

Both the auto service and collision sub-sectors had average remaining lease terms in excess of 12 years in Q4 2021. The auto service sub-sector represents the lowest cap rates in the net lease auto sector.

“The supply chain constraints and chip shortages increased the length of car ownership, benefiting the auto parts and auto service sectors,” Boulder Group’s senior vice president John Feeney said. “The current vehicle fleet in the United States continues to age, providing investors with further confidence in the auto parts and auto service sectors.”

J.D. Blashaw, vice president, MetroGroup Realty Finance, tells GlobeSt.com that the price tags for vehicles have risen dramatically over the past year, exacerbated by supply chain issues, which have contributed to a chip-shortage and both new and used cars to be in high demand. 

“Industry leaders such as O’Reilly, Advanced Auto, and AutoZone collectively saw an over 30% increase in share price in 2021, well ahead of the S&Ps pace of 18.8% growth,” Blashaw said. “We have continued to see a trend in both investor and owner-user clients looking to acquire or refinance properties in these industries to take advantage of strong fundamentals and a positive outlook from the lending community. Since vehicles are an essential good that many Americans rely on, this industry presents stability and security, with its resilience further proven since 2020.

“With historically low interest rates still present, we encourage our clients with tenant exposure in these industries to review their current rates and consider refinancing in light of current lender interest in the sector and predictions that the Fed will enact several interest-rate hikes this year.”