Single-Tenant Big-Box Retail Attracts Interest

By Ryan Butler and Brad Moulder, Directors, Stan Johnson Co.: Investors have recently been taking more interest in single-tenant net-leased big-box retail.
Brad Moulder

Brad Moulder

Ryan Butler

Ryan Butler

By Ryan Butler and Brad Moulder, Directors, Stan Johnson Co.

Investors have recently been taking more interest in single-tenant net-leased big-box retail. These assets are dependable investments, and favorable financing is available in today’s market. Institutional investors, as well as investors looking for 1031 exchanges, are especially drawn to big-box retail, as the properties are generally located in strong retail trade areas and are often in good primary and secondary markets. Also a plus for investors, big-box investments allow buyers to deploy a large amount of capital into a single asset, rather than needing to assemble a package of smaller properties. This can be key for exchange buyers working on a short timeline to find their replacement, or for institutional investors seeking to deploy a large amount of capital in a short period of time.

Financing for these properties is readily available from banks, life insurance companies and the CMBS market. Depending on lease term and location, both floating- and fixed-rate options are available, with a 20- to 30-year amortization schedule and a loan-to-value ratio in the 60 to 75 percent range. Interest-only financing could also be available on a case-by-case basis, dependent upon tenant credit, lease term and leverage ratio. For the right Depending on tenant, lease term and location, we are seeing book-end cap rates for big-box retail facilities in the low-5 to mid-6 percent cap range.

Big-box retail leases are fairly similar to other triple-net leases in that they are generally passive investments, with either limited or no landlord responsibilities. One common difference is that these properties are sometimes part of a larger shopping center, where you might be governed not only by your lease but also by a shopping center declaration or a reciprocal access and easement agreement. While it may require a bit more paperwork than your average transaction, it generally is not an issue and should not be a deterrent for a buyer working with an experienced broker.

Regardless of whether you are a buyer or seller, the outlook for investment in single-tenant big-box retail is favorable. Credit ratings for top big-box tenants can be some of the highest available. They generally come with longer-term leases and are usually in strong retail trade areas. However, the supply of big-box retail is somewhat constrained at the moment, as there has not been much new store development over the past five years. Due to this factor, combined with favorable financing that continues to be available, cap rates remain fairly low and valuations comparatively high for this product type.