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Cap rates for single tenant big box retail properties declined by 4 basis points in the fourth quarter to 7 percent, according to The Boulder Group in its Q4 2019 Net Lease Big Box Report.

"Overall, there was nominal compression year over year," says John Feeney, senior vice president for The Boulder Group. "This was primarily attributed to a decrease in cap rates across the entire net lease retail sector. Additionally, the 10-year treasury yield was down significantly over the same time period, which improved borrowing costs of buyers of this asset type."

While the big box sector benefits from larger trends in net lease, it is priced at a discount within the sector and has been since 2015. Net lease big box properties were priced at a 93-basis point discount to the overall market in the fourth quarter, according to The Boulder Group. Last year the differential was 79 basis points.

Feeney says number of factors are driving the differential between big box retail net lease and the rest of the net lease market, including a disproportionate amount of pressure on retailers in the big box or enclosed shopping mall space from e-commerce.

There are also other factors. "Big box properties have higher price points associated with them and this limits the buyer pool to some degree," Feeney says. "In the event of a vacancy, it can be costly to repurpose a large box property and there are limited tenants looking for spaces over 50,000 square feet."

In 2019, big box properties surpassed transaction volume for 2018, according to The Boulder Group. That volume included large portfolio and sale leaseback transactions by retail tenants, such as Albertsons, Bass Pro Shops and Regal Cinemas, among others.

"The overall net lease market benefited from low interest rates and alternative investment returns as well as a strong fund-raising environment," Feeney says. "In an investment market that is starved for yield, big box properties attracted investors with higher returns than available in other net lease sectors. Additionally, a few larger sale leaseback transactions helped anchor transaction volume in 2019."

Net lease big box properties with investment grade tenants had a 125-basis point cap rate premium over those without in the fourth quarter.

"If a tenant has an investment grade rating the terms that lenders are willing to provide to investors are more attractive thus increasing their returns," Feeney says. "Additionally, if a tenant has an investment grade rating with a positive outlook, one would hypothesize that the tenant is able to better withstand negative pressure whether e-commerce or economic."

The Boulder Group expects more activity in the big box net lease category in 2020.

"The single tenant net lease big box sector will remain active as investors seeking higher yields will target these assets. As the big box retailer environment continues to evolve, investors will be carefully monitoring tenant financial health and placing strong emphasis on the underlying real estate," The Boulder Group said in the report.