CHICAGO—The decision by Macy's, The Limited, and other retailers to close outlets around the US has shaken up the world of retail. And with some experts predicting that many more outlets will close this year, investors are definitely taking notice.
Cap rates in the single tenant net lease big box retail sector rose 42 bps to 6.5% from the fourth quarter of 2015 to the fourth quarter of 2016, according to research just published by The Boulder Group, a net lease firm located in Northbrook, IL. The firm attributes this increase to investor concern about the future of soft good retailers and the evolving size of floorplates for big box retailers.
“Big box properties, especially mid box and large format stores, have a significantly higher price point than other net lease retail properties,” the researchers note. “This can cause re-leasing costs to be higher due to tenant improvement allowances and the possibility of dividing space for multiple smaller tenants in the future.”
In the fourth quarter of 2015, big box properties were priced at a 17 bp premium to the overall net lease retail market, Boulder says. It attributes this to the large supply of Walmart Neighborhood Market properties in the market at the time. But in the fourth quarter of 2016, “the differential between big box cap rates and retail cap rates reverted to the norm with big box properties being priced at a 31 bp point discount to the overall retail market.”
Many people believe that Walmart, Target and Home Depot make up most of the big box sector, but junior big box tenants like Hobby Lobby, Goodwill and PetSmart made up the majority of the supply in the fourth quarter of 2016, Boulder says. Junior big box accounted for 50% of the supply while mid box and large format made up 37% and 13% respectively.
In the fourth quarter of 2016, about 25% of the big box supply was leased to investment grade tenants, the company adds. The cap spread between investment grade and non-investment grade tenants compressed in the fourth quarter of 2016 to just 15 bps, a big change from the previous year, when the spread was 155 bps, largely due to that concentration of Walmart Neighborhood Market properties.
“The single tenant net lease big box sector will remain active as both individual and institutional investors seek net leased properties with higher yields than the overall net lease retail sector,” Boulder concludes. “However, investors will carefully monitor retailer's store prototypes, especially as it relates to square footage as retailers continually shift the size of their stores. With changing retailer store formats, investors are paying greater attention to market rental rates and residual values when making acquisitions.”
CHICAGO—The decision by Macy's, The Limited, and other retailers to close outlets around the US has shaken up the world of retail. And with some experts predicting that many more outlets will close this year, investors are definitely taking notice.
Cap rates in the single tenant net lease big box retail sector rose 42 bps to 6.5% from the fourth quarter of 2015 to the fourth quarter of 2016, according to research just published by The Boulder Group, a net lease firm located in Northbrook, IL. The firm attributes this increase to investor concern about the future of soft good retailers and the evolving size of floorplates for big box retailers.
“Big box properties, especially mid box and large format stores, have a significantly higher price point than other net lease retail properties,” the researchers note. “This can cause re-leasing costs to be higher due to tenant improvement allowances and the possibility of dividing space for multiple smaller tenants in the future.”
In the fourth quarter of 2015, big box properties were priced at a 17 bp premium to the overall net lease retail market, Boulder says. It attributes this to the large supply of Walmart Neighborhood Market properties in the market at the time. But in the fourth quarter of 2016, “the differential between big box cap rates and retail cap rates reverted to the norm with big box properties being priced at a 31 bp point discount to the overall retail market.”
Many people believe that Walmart, Target and
In the fourth quarter of 2016, about 25% of the big box supply was leased to investment grade tenants, the company adds. The cap spread between investment grade and non-investment grade tenants compressed in the fourth quarter of 2016 to just 15 bps, a big change from the previous year, when the spread was 155 bps, largely due to that concentration of Walmart Neighborhood Market properties.
“The single tenant net lease big box sector will remain active as both individual and institutional investors seek net leased properties with higher yields than the overall net lease retail sector,” Boulder concludes. “However, investors will carefully monitor retailer's store prototypes, especially as it relates to square footage as retailers continually shift the size of their stores. With changing retailer store formats, investors are paying greater attention to market rental rates and residual values when making acquisitions.”
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