Right now, the big box world is a tale of two markets. Properties housing essential tenants, like grocery stores, are hot. Properties with gyms and movie theaters are struggling. Assets with investment-grade tenants are flourishing. Others are not.
The strong performance of the essential tenants has been a bit of a surprise
“A few years ago, people thought that because of Amazon, big boxes were going to have to downsize their business models and prototype,” says Randy Blankstein, president of The Boulder Group. “They will have a harder time competing.”
As the last year has proven, people still will buy their essentials in person. In fact, some of these stores are expanding.
For instance, Walmart continues to focus on super centers with groceries. “It makes sense,” Blankstein says. “People like grocery now. Groceries are in Target and Walmart. It’s not just the traditional grocery stores anymore.”
Some other retailers are moving in the opposite direction. “Kohl’s and Burlington [Coat Factory] are clearly changing prototypes to have a smaller footprint,” Blankstein says.
But where does that leave the big boxes with other non-essential tenants—that may not be able to adjust?
It’s an open question, but there should be a market for these properties… at the right price.
With higher returns available for big box assets when compared to other net lease sectors, investors seeking higher yields will continue to target these assets and evaluate the big box retailer environment as it continues to evolve, according to The Boulder Group.
And, some opportunistic investors will monitor the sector for non-credit big box properties. “They will seek assets with strong underlying real estate or below-market rents as these properties will provide above-average returns with potential future value,” according to The Boulder Group’s Q4 Big Box report.
But right now, sellers aren’t putting these non-essential properties on the market. It’s one reason why cap rates went up in The Boulder Group’s Q4 report.
“Things like Bed, Bath and Beyond, Petco, PetSmart or Staples are really not what people are looking for as far as essential,” Blankstein says. “It’s not that now they’re not trading. People aren’t even putting them on the market because they are looking for an event to happen—like a credit upgrade or business model change or things to get back to normal—before they dive into that [a sale].”
Stores like Staples, Bed Bath & Beyond, Petco and PetSmart, haven’t even been hitting the market, according to Blankstein.
“While Bed Bath & Beyond did a sale-leaseback, their properties are still not aggressively trading out there,” Blankstein says. “That’s not what people are looking for, and sellers and owners of those understand. So they don’t even put them on the market.”