Individual Investors vs. REITs in Big-Box Sector

By Randy Blankstein, President, The Boulder Group: The single-tenant, net-leased, big-box sector is back on the map.

Cap rates in the single-tenant, net-leased, big-box sector compressed from the fourth quarter of 2013 to the fourth quarter of 2014 by 39 basis points. The compression experienced by the big- box sector was greater than the overall net-lease retail sector, which decreased 35 basis points over the same time period. With net-lease retail cap rates at their historic low levels, investors have been able to achieve higher yields in the net-lease, big-box sector as net-lease, big-box properties were priced at a 21 basis point discount to the entire net lease retail market in the fourth quarter of 2014. The primary reason for the cap rate discount available in the big-box sector can be attributed to the re-leasing risk associated with the square footage of the properties and the significantly higher absolute price point when compared to the net lease retail market. Net-lease, big-box transaction velocity was down 47 percent in 2014 when compared to 2013 primarily due to a lack of new free standing construction as tenants such as Hobby Lobby, Ross and T.J.Maxx have been able to backfill second generation or inline space at low rents.

Big box properties tenanted by investment grade companies remain at the forefront of investor demand. However, the entire big box sector was made up of only 43 percent investment grade tenants in the fourth quarter of 2014. Big box properties tenanted by investment grade companies commanded a 100 basis point premium versus non-investment grade companies. However with retail cap rates at historic lows, some investors have looked to acquire higher yielding non-investment grade properties to boost portfolio returns. In 2013, big box transactions were dominated by REITs which accounted for 69 percent of all sales. In 2014, there was a shift in buyer type within the big box sector. Private buyers accounted 47 percent of the big box transaction that occurred in 2014 according to Real Capital Analytics, a 104 percent increase when compared to 2013. Private buyers continue to dominate the net-lease market in the low cap rate environment as institutions cannot typically pay the cap rate premiums due to yield restrictions.

The single-tenant net leased big-box sector will remain active as both individual and institutional investors seek net leased properties with higher yields. However, with low availability of net lease big box properties market participant expectations are for cap rates to hold steady or decline slightly in 2015.

Randy Blankstein is President of net-lease advisory firm The Boulder Group.