Big Box Cap Rates Fall, Led by Smaller Walmart Neighborhood Markets

Cap rates in the single-tenant net lease big box sector compressed 63 basis points during 2015 to end the year at 6.08 percent, reported the Boulder Group, Northbrook, Ill.

“The compression achieved by the big box sector was significantly greater than that of the entire net lease retail sector,” said Boulder Group Vice President John Feeney, noting that the entire sector saw only 25 basis points of cap rate compression during the year. “As a result, the fourth quarter of 2015 represented the first time since 2010 that the big box sector was priced at a premium to the entire retail net lease market.”

Feeney said much of the big box compression came from an influx of Walmart Neighborhood Market properties, which average just over 40,000 square feet compared to 185,000-square-foot Walmart Supercenters, per Urban Land Institute data. “Walmart Neighborhood Market properties made up approximately 22 percent of the overall big box sector and are investment-grade rated,” he said. He noted that the median asking cap rate for Walmart Neighborhood Market properties equaled 5.10 percent, increasing the sector’s cap rate compression.

Walmart announced on Jan. 15 that it will close 154 stores this year, including more than 100 Walmart Express locations, which average just 15,000 square feet. The retailer will close only four Walmart Supercenters. 

Feeney said Walmart’s announcement should not have a major impact on the big box sector. “The store closures will represent less than 1 percent of their global square footage,” he said. “The majority of the U.S. store closing are Walmart Express locations. Walmart has stated they plan to open 100 Walmart Neighborhood Markets and 60 Walmart Supercenters in 2017. Both Walmart Neighborhood Markets and Supercenters are in demand amongst 1031 buyers with large equity requirements.”

Big box properties occupied by investment-grade rated tenants command a 155 basis point premium over those without, Boulder said. But investment-grade tenants make up only 40 percent of the sector’s supply. “The majority of investors prefer investment-grade properties as they are easier to finance,” Feeney said.

Boulder expects that investors will continue to target long-term leased big box properties with investment-grade tenants. But it noted a lack of development and expansion for the major tenants except for Walmart Neighborhood Market stores. “With limited new development, investors may seek vintage properties recently backfilled with new big box users or properties with extended leases,” the firm’s Fourth Quarter Net Lease Big Box report said. “Short-term leased properties or non-credit tenants will garner interest due to the increased yield if the properties exhibit strong real estate fundamentals or high residual values.”