As investors chased big box assets with investment-grade, essential tenants, cap rates in the single tenant net lease big-box sector decreased by 25 basis points to 6.75% from Q4 2019 to Q4 2020, according to The Net Lease Big Box Report from The Boulder Group.
Properties with grocery related tenancy accounted for more than 30% of the market, up 22% from 2019. But properties with tenants, such as Walmart, Costco, Target, Home Depot and Lowe’s also did well.
“Big boxes are highly divided, and clearly, things like Lowe’s, Home Depot, Costco and Target did great during COVID,” says Randy Blankstein, President of The Boulder Group. “So that is the stuff that traded.”
Not surprisingly, investor interest in properties with tenants that were shut down during the pandemic, such as fitness centers, movie theaters and experiential retail categories, was virtually non-existent, according to The Boulder Group. It says the challenges that the pandemic and e-commerce created for retailers resulted in net lease big box properties being priced at a 75-basis point discount to the overall net lease market.
Cap rates were lowest in the Western region at 5.65%. That was followed by the Mountain region (6.60%), South (6.65%), Midwest (7.08%) and Northeast (7.09%).
In Q4 2020, big-box properties with investment-grade rated tenants were priced 105 basis points lower than their non-investment grade counterparts, according to The Boulder Group. And even that can be misleading.
“Even though it only looks like a 105-basis point spread between the investment grade and non-investment grade, the reality is it’s a lot greater,” Blankstein says. “Those are just the things that people will put on the market to trade. And that is only the better stuff because no one is putting a fitness facility or a movie theater up [for sale] right now. “The non-investment grades that are trading are Albertsons and Sportsman’s Warehouse.”
Blankstein thinks the single tenant net lease big-box sector will remain bifurcated as investors monitor the continued effects of e-commerce’s growth and the impact of the Covid-19 pandemic.
In the report, The Boulder said that assets with investment-grade tenants with essential uses experienced increased demand from investors in both the private and institutional sectors. But still, private buyers constitute most of the market.
“The reason it is private buyers [who make most of the purchases] is the cap rates for a Walmart, Lowe’s, Home Depot or things of that nature are really primarily under 5.5%,” Blankstein says. “That’s a tough number for an institution to buy.”
Blankstein says REITs and institutions are mainly buying big-box properties that are $20 million or more. “In the $8 to $20 million range, it’s still the private buyers who are dominating,” he says. “Most REITs just can’t buy things at 5% and 5.25%. They really need to be at 5.75% to 6%. So they’re just not as competitive in this space, just because of where cap rates are today.”