March 8, 2022

Single Tenant Auto Properties Compress Amid Increasing Demand

A market dominated by auto parts retailers, the single-tenant auto sector’s national asking cap rates decreased to 5.40% in Q4, according to The Boulder Group’s 2021 Net Lease Auto Report.

This represented a 49-basis point increase when compared to the prior year.

According to the report, in comparison, the net lease retail sector experienced cap rate compression resulting in a 12-basis point decline over the course of 2021.

It’s a “Safe Sector” to Be In

Jason Long, Northmarq Associate Vice President who has a deep track record of auto sector sales, tells GlobeSt.com that even post-pandemic, buyers are still actively seeking out essential retailers, so the automotive sector remains strong and in high demand.

“A lot of investors feel safe in this sector, and there are options that appeal to a wide range of buyers. For investors new to net lease, there are low price point deals to be had, and we’ve seen significant growth with tenants like Take 5 Oil Change.

“Just in the past six months, we’ve tracked more than 30 of these deals that are selling between $1 million and $2 million. But the auto sector has quite a few tenants that structure their leases in a double net fashion, and that can be intimidating to new investors.

“For tenants like Advance Auto Parts or O’Reilly that typically operate on double net leases, repeat owners are used to that expense responsibility and continue to pursue these opportunities due to the strength of credit and great locations.”

Average Remaining Lease Term for Auto Parts Sector Less than Nine Years

Development and tenant expansion in this category lagged historical standards which led to an average remaining lease term of less than nine years for the auto parts sub-sector.

Both the auto service and collision sub-sectors had average remaining lease terms in excess of 12 years in Q4 2021. The auto service sub-sector represents the lowest cap rates in the net lease auto sector.

J.D. Blashaw, vice president, MetroGroup Realty Finance, tells GlobeSt.com that the price tags for vehicles have risen dramatically over the past year, exacerbated by supply chain issues, which have contributed to a chip-shortage and both new and used cars to be in high demand.

“Industry leaders such as O’Reilly, Advanced Auto, and AutoZone collectively saw an over 30% increase in share price in 2021, well ahead of the S&Ps pace of 18.8% growth,” Blashaw said. “We have continued to see a trend in both investor and owner-user clients looking to acquire or refinance properties in these industries to take advantage of strong fundamentals and a positive outlook from the lending community. Since vehicles are an essential good that many Americans rely on, this industry presents stability and security, with its resilience further proven since 2020.

“With historically low interest rates still present, we encourage our clients with tenant exposure in these industries to review their current rates and consider refinancing in light of current lender interest in the sector and predictions that the Fed will enact several interest-rate hikes this year.”