Randy Blankstein, president, The Boulder Group, Wilmette, IL

WILMETTE, IL—Cap rates in the single tenant net lease big box sector increased by 29 basis points, to 7.04% from the fourth quarter of 2017 to the fourth quarter of 2018, according to The Boulder Group, a Wilmette, IL-based boutique investment firm specializing in single tenant net lease properties.

Boulder says the rise in cap rates is mainly due to investor concern about the evolving retail environment, store footprints for big box retailers and the cost associated with filling big box properties.

Over the past year, tenant bankruptcies and store closures due to the struggles or failures of well-known retailers including Toys R Us, Orchard Supply (Lowe's), Sears/Kmart and Shopko led to increased vacancy in the sector.

Cap rates for the sector increased more than the overall net lease retail sector, Boulder Group says. In the fourth quarter of 2018, net lease big box properties were priced at a 79-basis-point discount to the overall net lease market, an 11-basis-point increase from the prior year. Regionally, median cap rates are the lowest in the west, at 6.29%, and highest in the Midwest, at 7.4%. Median cap rates in the Northeast were 7.25%, and 7.06% in the South.

Big box properties in primary retail corridors with strong real estate fundamentals remain in demand among institutional investors and large 1031 exchange buyers, even with the troubles facing non-credit tenants within the big box retail space, Boulder's report says. An investment grade property would command a median asking price of $176 per square foot, vs. $141 per square foot for a non-investment grade property, Boulder says.

Notable transactions in the fourth quarter were the $25.921 million Safeway deal in Olney, MD in November, at a price of $434 per square foot, at a 5.78% cap rate with 19 years remaining in the lease; an October deal involving Mariano's in Crystal Lake, IL, for $25.2 million, or $337 per square foot, at a 5.88% cap rate with 20 years left; and the Mount Vernon, NY, Stop & Shop, at $22.25 million, or $276 per square foot, at a 6.98% cap rate, with five years remaining on the lease.

Expanding retailers including Burlington, TJ Maxx/HomeGoods and Hobby Lobby and real estate investors were quick to acquire or lease the more desirable real estate vacancies left behind by retailer bankruptcies in 2018. Transaction volume in the net lease big box sector in 2018 reflected a similar pace to 2017.

Income investors are more sensitive to tenant quality and financial health in the net lease big box sector. Investment grade tenants including Walmart, Costco, Whole Foods and others get a significant premium over non-investment grade users, according to Boulder's research. In the fourth quarter of 2018, investment grade tenants in the big box sector were commanding a 68-basis point premium. This is more than double the premium associated with this category one year earlier.

The single tenant net lease big box sector will remain active, Boulder says. Both individual and institutional investors are looking for net leased properties to meet acquisition targets and for 1031 exchanges. With yields higher than the overall net lease retail sector, many investors will be targeting assets with strong real estate fundamental after careful underwriting and understanding of local retail markets.

However, Boulder cautions, big box properties with issues related to tenant health and financial strength and properties with irreplaceable rents or tertiary locations will be in less demand.

Instant Insights /

Single-Tenant Big Box Cap Rates Jump in Fourth Quarter

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