Cap Rates Compress in Net Lease Auto Parts Store Sector

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Cap rates in the single tenant net leased auto parts store sector compressed from the fourth quarter of 2011 to the fourth quarter of 2012. The auto parts sector, for the purpose of this report, is defined as Advance Auto Parts, AutoZone and O’Reilly Auto Parts, which are all investment grade companies as rated by Standard & Poor’s. The cap rate compression was derived by the combination of a lack of available newly developed assets and the limited availability of investment grade assets below $2 million in the net lease market. The auto parts sector is one of the only segments within the net lease market experiencing robust growth with over 500 auto parts stores opened in 2012. Despite the sector’s ongoing expansion plans, many of the new stores will not be brought to market as the tenants own a high percentage of their locations. Demand for auto parts stores is strong as they offer long term leases to investment grade tenants and are typically constructed as vanilla boxes which are easier to re-tenant in the event the tenant vacates.

Fee simple auto part stores have an average asking price of $1,767,570 with an average price per square foot of $251 as opposed to ground leased AutoZone properties which have an asking price of $1,180,000. Properties in the auto parts sector are trading at a 72 basis point premium to the net lease market as a whole due to the quality of the tenants and the length of their leases for newly constructed assets.

The retail industry shows strong consumer demand for auto parts stores in the current economy as consumers are repairing their vehicles instead of purchasing a new vehicle. A recent report by R.L. Polk & Co., shows that the average age of vehicles on the road has increased to 10.8 years and the average length of vehicle ownership has increased to 71 months. The $118 million retail auto parts sector is viewed favorably as the amount of older vehicles on the road continues to grow and the number of “Do-It-Yourself” consumers increases.

Transaction volume in the auto parts sector remains heavily concentrated in properties with lease terms of over ten years remaining. Auto parts store properties with shorter lease terms located in larger markets with strong demographics also remain in high demand. The single tenant net lease auto parts sector will continue to remain active as private investors seek properties with long term leases, investment grade tenants and attractive price points.

Randy Blankstein is President of Net Lease Advisory firm The Boulder Group.

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