Changes in technology won’t slow the Net Lease Auto Sector
The auto industry has seen an unbelievable change since the first Model Ts rolled off the assembly line. And it is clear that watershed changes will continue, thanks to ever-advancing technologies. However, in the midst of these decades of change, there is one constant: the need for parts and service has remained, and will remain, ever present. Needless to say, as long as the US has its love affair with the car, no matter what it looks like or how it drives, the service centers and parts retailers that make up the Net Lease Automotive Sector are well-positioned for the future.
Over the past 12 months, service center properties have sold at an average price of $2.2 million and auto parts stores have sold around the $1.8 million mark, both providing attractive price points for private investors.
For service center locations, investors need to be aware of any potential environmental issues, such as spilled or improperly discarded oil. In addition, service centers can come in unusual sizes, which may cause difficulties when trying to backfill the space with a new tenant from a different industry. The auto parts stores, by contrast, are clean assets of more traditional retail configurations and so are relatively easy to retenant.
The auto parts subsector is dominated by Advance Auto Parts, AutoZone, and O’Reilly Auto Parts. These tenants offer investors investment-grade corporate guarantees and solid locations.
Cap Rates by Tenant
As the top retailers in the sector, Advance, AutoZone and O’Reilly all offer significant upside to the investor. Comparatively, AutoZone and O’Reilly Auto Parts trade at a premium to the Single Tenant Net Lease (STNL) average. Advance Auto Parts currently trades at a discount, due in part to having the fewest lease years remaining on average.
Cap Rates by Term Remaining
The number of years remaining on a lease will have a large impact on the cap rate at which properties sell. The premium investors pay for a property will increase along with the remaining lease years. The upside is rental income for a longer term and the security associated with a long-term, stabilized asset.
Cap Rates by Lease Type
The auto parts subsector features a variety of lease types, which tend to trade at different cap rates. Ground Lease (GL) tenants are leasing the land from passive investors, and these tend to trade at the lowest cap rates due to two common factors: First, GLs require no landlord responsibilities and are longer than other types of leases. Second, GL tenants have to build and maintain their own improvements. With such a large upfront cost, tenants typically sign long leases with options to extend.
Triple Net Leases (NNN) also offer a passive investment in which the investor owns the land and building, while the tenant is responsible for maintenance, taxes and insurance.
Double Net Leases (NN) trade at the highest cap rates. Double net leases require some form of landlord responsibility, such as maintaining or replacing the roof and structure. These possible expenses push cap rates higher than their triple net counterparts.
Cap Rates by Region
The demand for net lease properties in California has kept cap rates low, even though the state was home to assets with the fewest number of lease years remaining on average. As the chart shows, cap rates rise from there on a regional basis, until we enter the South, where cap rates hit a national high of 6.59%.