Cap rates for the single-tenant net leased auto parts store sector increased by 18 basis points from the fourth quarter of 2018 to the fourth quarter of 2019 to 6.44 percent. The auto parts sector, for the purpose of this report, is defined as Advance Auto Parts, AutoZone and O’Reilly Auto Parts as they account for the highest percentage of single-tenant transactions of properties occupied by auto parts retailers. The primary reason contributing to the increase in cap rates was an increase in supply of vintage properties with shorter lease terms remaining. In the fourth quarter of 2019, the median remaining lease term for the sector decreased to seven years, down from nine years one year earlier.
The majority of the sector is comprised of Advance Auto Parts properties (56 percent), which have cap rates significantly higher than competitors. During the fourth quarter of 2019, properties tenanted by Advance Auto Parts had cap rates of 6.95 percent—an increase of 20 basis points when compared to 2018. Advance Auto Parts were priced at more than a 100 basis point discount to AutoZone and O’Reilly Auto Parts properties. This was primarily due to a slightly lower credit rating associated with Advance Auto Parts and a greater supply of shorter term leases in the market.
As the current vehicle fleet in the United States continues to age, investors are seeking properties occupied by auto parts retailers. According to IHS Markit, the typical age of a vehicle on the road is approximately 12 years old. This represents an all-time high and has increased an average of 4 percent over the last five years. The aging car fleet drives auto part demand from consumers, garages and service stations.
Making the Grade
Transaction volume in the net lease auto parts retail sector increased by approximately 6 percent in 2019 over 2018. The low absolute price point of properties within the net lease auto parts store sector make these investments attractive to investors. Outside of dollar stores, there is a limited supply of net leased properties available under $2 million leased to investment-grade-rated tenants.
Transaction volume in the auto parts sector should remain similar to 2019 as investors continue to seek properties with investment-grade tenants at lower price points. However, there will be increased competition amongst new construction assets as the average remaining lease term for the sector continues to dwindle. Auto parts store properties with shorter lease terms located in areas with strong real estate fundamentals also remain in high demand among buyers seeking higher yields.
Randy Blankstein is President of net lease advisory firm The Boulder Group.