The single-tenant net-leased (STNL) market has always been the place to find high-quality, low-management investment real estate – but navigating these waters to achieve a sensible return has become much more challenging over the past few years. Nevertheless, STNL. properties have continued lo experience tremendous velocity nationwide while achieving record cap rates, especially in California.
Corporate-backed tenants with long-term leases like banks, quick service restaurants (QSRs) and drug stores have predominately been the most desirable assets, but significant cap rate compression has come with this demand. Single-tenant assets like Chase Bank, Wells Fargo, McDonald’s, 7-Eleven and Starbucks arc now regularly trading in the 3.5 percent to 4.5 percent cap range. Some are trading even lower in parts of California, while new 20-year leased Walgreens and CVS drugstores along the West Const arc now trading in the 4.5 percent to 5 percent cap range, with flat leases. This has caused investors to look for alternative single-tenant investments with more favorable cap rates: enter auto parts stores.
STNL auto parts stores are strong, viable retail investment alternatives to banks, fast-food QSRs, convenient stores and drugstores. Auto parts stores like AutoZone, O’Reilly Auto Parts and Advanced Auto Parts have excellent BBB credit ratings and strong financials. They also have long-tenn leases with replaceable rent, if needed. Another unique facet to auto parts stores is their incredible resistance lo economic downturns. When things go south, people keep their cars longer. These kinds of attributes are attracting investors and swooning capital. Additionally, O’Reilly’s stock price is up 50 percent over the past 12 months, while AutoZone is up 30 percent over the same period.
Hanley Investment Group (HIG) has negotiated the sale of five STNL O’Reilly Auto Parts stores over the past year. They featured an average cap rate of 5.6 percent and an average lease term of more than 10 years. An O’Reilly Auto Parts just northeast of Sacramento recently sold for $2.6 million, representing a 5.31 percent cap rate. The single-tenant, absolute NNN O’Reilly Auto Parts store had 12 years remaining on the primary lease term.
HlG also executed the sale of another single-tenant O’Reilly in Montrose, Colo., with more than 11 years remaining on the triple-net lease. lt went for $1.7 million at a 5.68 percent cap rate.
The average cap rate of an O’Reilly trading in the Western United States over the past 12 months has been 5.85 percent (out of a total of 16 transactions), according to CoStar. This is compared to the national average of 6.24 percent. The sale of the O’Reilly Auto Parts property in Auburn represents a 54-basis point advantage over the average cap rate. This is another example of an investor’s desire to keep capital in the Western United States, especially in California.
HIG has also closed four STNL AutoZone stores in the past year with an average cap rate of 5.78 percent. CoStar lists a total of 26 single-tenant AutoZone deals that occurred in the United States over the past 12 months, five of which were out West. With an average cap rate of 6.1 percent, AutoZone velocity may be lower, but demand is still strong.
The auto parts store category will continue to do well as many Americans are holding onto their cars longer. The average age of cars and trucks in operation in America hit a new all-time high of 11.4 years in 2014, up slightly from 11.3 years in 2013, according to a study by IHS Automotive. IHS forecasts that the average age of vehicles is expected to rise to 11.7 years by 2019. Not only is the average vehicle in America getting older, but the study has also found that the country has a record number of vehicles in operation. There were a total of 252.7 million vehicles in 2014, an increase of 3.7 million vehicles in 2013. The continued increase in the number of older vehicles explains why after-market auto parts retailers like AutoZone and O’Reilly Auto Parts have done so well in the past few years.
While cap rates continue to compress on other STNL properties, auto parts stores remain a more attractive in vestment that is resistant to economic turmoil. It is a great alternative for investors seeking high-quality STNL investments.