Cap rates in the single tenant net lease big box sector compressed from the fourth quarter of 2014 to the fourth quarter of 2015 by 63 basis points to a 6.08% cap rate.
The compression achieved by the big box sector was significantly greater than that of the entire net lease retail sector. From the fourth quarter of 2014 to the fourth quarter of 2015, the net lease retail sector compressed by only 25 basis points. As a result, the fourth quarter of 2015 represented the first time since 2010 that the big box sector was priced at a premium to the entire retail net lease market.
Much of the compression experienced in the big box sector can be derived from the influx of Walmart Neighborhood Market properties that were introduced to the market throughout 2015. There was over a 200% increase in Walmart Neighborhood Market properties available in the fourth quarter of 2015 when compared to the prior year. Walmart Neighborhood Market properties made up approximately 22% of the overall big box sector and are investment grade rated. The median asking cap rate for Walmart Neighborhood Market properties was 5.10% leading to much of the cap rate compression within this sector.
The median asking price for net lease big box properties was $9 million in the fourth quarter. This figure was even higher for properties tenanted by investment grade rated companies at approximately $12 million. Big box properties tenanted with investment grade rated tenants command a 155 basis point premium over those without. However, only 40% of the sector’s supply is tenanted by investment grade tenants. The majority of investors prefer investment grade properties as they are easier to finance.
It is expected that investors will continue to target long term leased big box properties with investment grade tenants. However, it should be noted that there is a lack of development and expansion for the major tenants in this sector excluding Walmart Neighborhood Market. With limited new development, investors may seek vintage properties recently backfilled with new big box users or properties with extended leases. Investors will be carefully monitoring the tenant’s most recent store prototype footprints as retailers continue to shift the size of their stores. Short term leased properties or non-credit tenants will garner interest due to the increased yield if the properties exhibit strong real estate fundamentals or high residual values.
About the author: Randy Blankstein is President of net lease advisory firm The Boulder Group.