10 Feb 15 By Cole Flanagan, CPA, MBA No Comments

Cap Rates Decline for Big Box Retail

February 5, 2015 By Brian J. Rogal

CHICAGO—“Cap rates in the single tenant net leased big box sector compressed from the fourth quarter of 2013 to the fourth quarter of 2014 by 39 bps,” according to the latest report from the Boulder Group, a net lease firm based in suburban Chicago. The decline from a 7.10% cap rate last year to 6.71% by the end of last quarter parallels a similar decline in other retail properties. As reported in GlobeSt.com, Boulder found that rates in the net lease retail market sank from 6.85% last year to 6.50% in the fourth quarter, the data show. Still, that leaves a 21 bps gap between that market and the big box sector.

Boulder attributes that gap to the re-leasing risk associated with the much larger big box properties and their significantly higher prices. Net lease big box transaction velocity was down 47% in 2014 when compared to 2013, the firm found. Much of this was due to a lack of new construction as many tenants such as Hobby Lobby, Ross and T.J.Maxx were able to backfill second generation or inline space at low rents.

“Big box properties tenanted by investment grade companies remain at the forefront of investor demand,” the firm added. “However, the entire big box sector was made up of only 43% investment grade tenants in the fourth quarter of 2014.” Big boxes occupied by investment grade companies commanded a 100 bps premium compared to non-investment grade companies. However, with retail cap rates at historic lows, some investors want the higher yields promised by those non-investment grade properties.

In 2013, REITs were responsible for 69% of the big box sales, but last year there was a shift. Private buyers boosted their share of big box transactions to 47%, according to Real Capital Analytics, a 104% increase over 2013. “Private buyers continue to dominate the net lease market in the low cap rate environment as institutions cannot typically pay the cap rate premiums due to yield restrictions,” Boulder found.

“The single tenant net leased big box sector will remain active as both individual and institutional investors seek net leased properties with higher yields,” the company added. “However, with low availability of net lease big box properties market participant expectations are for cap rates to hold steady or decline slightly in 2015.”


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