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Cap Rates Rise for Net Lease Big Box Assets Over Evolving Space Demands
Cap rates in the single-tenant net-lease big box sector increased by 25 basis points (bps) to 6.75% from the fourth quarter of 2016 to the fourth quarter of 2017, according to The Boulder Group’s latest national net-lease big box market research. The rise in cap rates can be primarily attributed to investor concern about the evolving square-footage demands for big-box retailers.
The report cited Kohl’s announced store footprint decrease in favor of more digital offerings, as an example of how this strategy is playing out in the marketplace.
Yet, with investor concern lingering over big-box properties, tenant credit proved to play a big role in investor demand. Big box properties leased to investment-grade properties were priced at a 33 basis point premium over non-investment grade properties. This spread more than doubled from the prior year. In Q4 2017, investment-grade big box properties only accounted for 25% of the total supply.
Another concern of investors involves the potential backfill of big box properties. The re-leasing costs associated with big box properties tend to be higher due to required tenant improvement allowances and the possibility of dividing space for multiple smaller future tenants.
As cap rates continued to rise for big box properties in the fourth quarter of 2017, the spread between net-lease big box properties and cap rates for the overall net-lease retail market widened. In Q4 2017, big box properties were priced at a 68 basis point discount to the overall net-lease retail market, up from 31 bps the prior year. Additionally, high price points limit the size of the buyer pool. The median asking price for net-lease big box properties was $8.9 million in the fourth quarter of 2017, The Boulder Group reported.
The single-tenant net-lease big box sector is expected to remain active, The Boulder Group forecasted, as both individual and institutional investors seek net-lease properties with higher yields than the overall net lease retail sector. However, concern for many big box retailers will force investors to carefully scrutinize the residual real estate and alternative uses the properties can achieve. And, investors will carefully monitor retailer’s store prototypes, especially as it relates to square footage as retailers continually shift the size of their stores.
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