Cap Rates for Single-Tenant Big Box Properties Compress

The Boulder Group, Wilmette, Ill., said single-tenant net lease big box sector cap rates compressed 25 basis points between late 2019 and late 2020 to 6.75 percent.

Increased investor interest in grocery and home improvement tenants largely drove the change, said Boulder Group President Randy Blankstein. “The decrease in cap rates can be primarily attributed to an increased appetite from investors for big box tenants that operate in the essential business category such as grocery-related and home improvement” he said.

Despite numerous headlines surrounding retail and the COVID-19 pandemic, demand for big box retail assets with investment-grade tenants remains strong for specific tenants, noted Boulder Group Partner Jimmy Goodman. “The grocery sector was the winner during the pandemic in addition to other retailers including Walmart, Costco, Target, Home Depot and Lowe’s,” he said. “In the fourth quarter, properties with grocery-related tenancy accounted for more than 30 percent of the market.”

While investors have looked for investment-grade retailers in essential businesses throughout the pandemic, tenants in businesses that were targeted by governmental shutdowns experienced the opposite effect, Boulder reported. Tenants in the fitness, movie theater and experiential retail categories suffered from the pandemic, so investor interest in these categories was “virtually non-existent,” the firm said.

Boulder Group Senior Vice President John Feeney said tenant quality and financial resiliency will continue to be “top of mind” for net lease investors. Cap rates for big box properties with investment-grade rated tenants were 105 basis points lower than their non-investment grade counterparts, he said.

“However, opportunistic real estate investors will carefully be monitoring the sector for non-credit big box properties,” Feeney said. “Investors will seek assets with strong underlying real estate or below market rents as these properties will provide above average returns with potential future value.”

The single tenant net lease big box sector “will likely remain bifurcated for some time,” Blankstein said. “Investors will carefully monitor the continued effects of e-commerce’s growth and the impact of the COVID-19 pandemic. With higher returns available when compared to other net lease sectors, investors seeking higher yields will continue to target these assets and evaluate the big box retailer environment as it evolves.”