Single-Tenant Auto-Parts Sector Cap Rates Compress

By Randy Blankstein, President, The Boulder Group: Cap rates in the single-tenant, net-leased, auto-parts store sector is now something to watch instead of all that talk about compression.

Randy_Blankstein_480x270 Cap rates in the single-tenant, net-leased, auto-parts store sector compressed from the fourth quarter of 2012 to the fourth quarter of 2013 by 31 basis points. The auto parts sector, for the purpose of this report, is defined as Advance Auto Parts, AutoZone and O’Reilly Auto Parts as they are the largest tenants within the auto parts sector. The cap rate compression was derived by the limited supply of investment grade assets priced below $2 million in the net lease market outside of dollar stores.

For assets priced below $2 million, there are more private and 1031 exchange buyers than institutions. Typically private investors and 1031 exchange buyers, due to the tax implications, pay a premium over institutions. Despite the auto parts sector’s 500 new store openings in 2013, the supply of auto stores decreased in the net lease market by 5 percent from the fourth quarter of 2012 to the fourth quarter of 2013. This can best be attributed to the fact that the companies own an increasingly high percentage of their locations.

While cap rates for the entire net leased auto parts sector decreased by 31 basis points from the fourth quarter of 2012 to the fourth quarter of 2013, cap rates for Advance Auto Parts remained near levels from the previous year. AutoZone and O’Reilly Auto Parts experienced the greatest cap rate compression, 50 and 55 basis points respectively. This can best be attributed to the lease structure offered by these tenants. AutoZone and O’Reilly Auto Parts typically sign 20 year leases as opposed to Advance Auto which typically signs 10 or 15 year leases.

A significant event in the auto parts sector occurred after the conclusion of the fourth quarter of 2013. In January 2014, Advance Auto Parts closed on its $2 billion acquisition of General Parts International, which includes the CARQUEST and WORLDPAC brands. This acquisition makes Advance Auto Parts the largest supplier of automotive aftermarket parts and the largest distributor of import automotive parts in North America. This acquisition balances the Do-It-Yourself (DIY) and Do-It For-Me (DIFM) markets for Advance Auto Parts, a strategic move as the DIFM market is experiencing two times the growth of the DIY segment.

Transaction volume in the auto parts sector remains heavily concentrated in recently constructed properties with long-term leases. Auto parts store properties with shorter lease terms located in areas with strong real estate fundamentals also remain in high demand. The single tenant net lease auto parts sector will continue to remain active as private investors and 1031 exchange buyers seek properties with long term leases, investment grade tenants and attractive price points.