By Randy Blankstein, President, The Boulder Group
Cap rates for the single-tenant, net-leased auto parts store sector decreased by 8 basis points from the fourth quarter of 2015 to the fourth quarter of 2016 to 5.9 percent. The decline in cap rates for the auto parts store sector slightly outpaced the overall net lease retail market, which compressed by 6 basis points over the same time period. 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.
Cap rates for Advance Auto Parts increased by 3 basis points while cap rates for AutoZone and O’Reilly Auto Parts compressed 20 and 16 basis points, respectively, in the fourth quarter of 2016. The cap rates for Advance Auto Parts properties were higher than its peers due to a higher supply of older stores on the market. The median remaining lease term for the auto parts sector was 11 years and less than 9 years for Advance Auto Parts.
As Americans continue to increase their length of car ownership and the average age of vehicles on the road increases, the retail auto parts industry continues to thrive as the market for auto repairs and aftermarket parts becomes more necessary. A recent report by IHS Markit confirms that the average age of vehicles on the road has increased to 11.6 years. The same report also found that the segment consisting of the oldest vehicles on the road is increasing at the fastest pace. IHS Markit expects the segment of vehicles older than 16 years to grow by 30 percent to 81 million by 2021.
Transaction volume in the auto parts sector should remain active, as investors continue to seek properties with investment-grade tenants at lower price points. Additionally, the fundamentals of the retail auto parts industry make these properties attractive to varying investors. Recently constructed properties with long-term leases should continue to be in the highest demand because these assets are the most sought-after among 1031 buyers due to their lease term duration. Auto parts store properties with shorter lease terms located in areas with strong real estate fundamentals also remain in high demand with buyers seeking higher yields.