CHICAGO—The cap rates for many single tenant net leased properties have sunk to historic lows over the past year. And in some of these sectors, the rates have kept going lower as investors show more interest, and the number of stores on the market decreases. According to a new report by the Boulder Group, for example, rates in the auto parts store sector compressed from the fourth quarter of 2012 to the fourth quarter of 2013 by 31 bps.
“The auto parts sector, for the purpose of this report, is defined as Advance Auto Parts, AutoZone and O’Reilly Auto Parts as they account for the highest percentage of transactions within the auto parts sector,” the report notes. A limited supply of investment grade assets has helped push the rates down. Even though the sector saw about 500 new store openings in 2013, the supply actually available on the net lease market decreased by 5%, mostly because the big companies own an increasingly higher percentage of their locations.
Cap rates for Advance locations did, however, remain nearly flat, ending the year at 7.2%. AutoZone and O’Reilly Auto Parts, on the other hand, saw their cap rates compress 50 and 55 bps, respectively, down to 6.0%. Investors typically show more interest in AutoZone and O’Reilly locations because these tenants usually sign 20-year leases, as opposed to Advance Auto where they typically sign 10- or 15-year leases.
In January 2014, Advance Auto Parts closed on its $2 billion all-cash acquisition of General Parts International, which includes the Carquest and Worldpac brands. This acquisition makes Advance the largest retailer of auto parts in North America, boosts its presence in the auto repair market and in the supply of parts for imported cars.
“Transaction volume in the auto parts sector remains heavily concentrated in recently constructed properties with long term leases,” Boulder notes. However, research also shows that investors will go after auto parts stores in robust markets even if the tenants have shorter leases. “The single tenant net lease auto parts sector will continue to remain active as private investors and 1031 exchange buyers seek properties with long term leases, investment grade tenants and attractive price points.”