The Boulder Group cites high demand from surplus of capital as the primary factor.
National asking cap rates in the single-tenant big box sector decreased to 6.25% in the fourth quarter of 2021, representing a 50-basis point decrease when compared to the prior year.
According to Boulder Group’s 2021 Net Lease Big Box Report, “The decrease in cap rates can be primarily attributed to increased activity in the big box sector from substantial amounts of capital targeting this sector, particularly institutional investors,” president Randy Blankstein said in prepared remarks. “Once the economy began to recover from the initial pandemic, activity within the sector increased.”
In Q4 2021, less than 10% of the net lease big box sector was comprised of investment grade grocery related or home improvement tenants. Properties with these tenants were priced at an even greater premium.
Big Box Still Priced at a Discount
In Q4 2021, investment grade grocery and home improvement related properties had an average cap rate of 5.05%. With a limited supply of inventory and increased demand for these assets from individual and institutional investors alike, many of these properties are being sold on an off-market basis.
“Despite the positive investor sentiment for the big box sector, these properties are still priced at a discount to the overall net lease retail market,” John Feeney, Senior Vice President, The Boulder Group adds. “In the fourth quarter of 2021, the net lease big box sector was priced at a 37-basis point discount to net lease retail.”
The single tenant net lease big box sector will continue to see demand from both individual and institutional buyers. The most conservative investors will pay a significant premium for specific assets such as Walmart and Home Depot.
“The higher yields generated by this asset class will be attractive to financial buyers utilizing low interest rate debt,” according to Blankstein. “Despite lower demand for non-investment grade big box, a market for these assets still exists for properties with favorable underlying real estate, strong performing locations or below market rents.”
Comfort in Non-Essential Retailers Grew through 2021
At the height of the COVID-19 pandemic, big box property investors flocked to tenants categorized as essential retail with investment grade ratings including grocery and home improvement.
Throughout 2021, big box investors became more comfortable with non-essential retailers. Accordingly, the spread between investment grade and non-investment grade big box retailers shrunk to 90 basis points from 105 basis points.
“Following the surge in demand for essential and investment grade retailers in 2020, the supply of these assets was limited in 2021,” Jimmy Goodman, Partner, The Boulder Group, added.