Cap Rates Increase For Big-Box Stores

Single-tenant net lease big box store cap rates increased 25 basis points last year to 6.75 percent, reported Boulder Group, Northbrook, Ill.

Boulder Group Vice President John Feeney attributed the cap rate increase to investor concern about “evolving” square footage demands for big box retailers. “For example, Kohl’s announced that they were decreasing the footprint of their stores and would plan on bolstering their digital offerings,” he said.

Feeney said as investor concerns about big box properties linger, tenant credit plays a growing role in investor demand. For example, big box properties leased to investment-grade tenants priced at a 33 basis point premium over non-investment-grade properties, he noted. “This spread more than doubled from the prior year,” he said, noting investment-grade big box properties accounted for just one-quarter of the total supply in late 2017.

As big box property cap rates continued their rise in the fourth quarter, the spread between cap rates for big box properties and cap rates for the overall net lease retail market widened, Boulder reported. In fourth-quarter 2017, big box properties priced at a 68 basis point discount to the overall net lease retail market, up significantly from a 31 basis point discount the prior year. “Their high price points limit the size of the buyer pool,” the report said, noting a pricey $8.9 million median asking price for net lease big box properties in the fourth quarter.

Feeney said investors worry also about the “backfill potential” of big box properties. “The re-leasing costs associated with big box properties tend to be higher due to required tenant improvement allowances and the possibility of dividing space for multiple smaller tenants in the future,” he said.

The single-tenant net lease big box sector will likely remain active as both individual and institutional investors seek net leased properties with higher yields than the overall net lease retail sector, the report predicted. “However, concern for many big box retailers will force investors to carefully scrutinize the residual real estate and alternative uses the properties can achieve. Additionally, investors will carefully monitor retailer’s store prototypes, especially as it relates to square footage as retailers continually shift the size of their stores.”