In 2015 cap rates for net lease NNN Big Box properties had only a 25 basis point premium over the averages for NNN net lease retail investment market. With an ongoing focus on tenant financial performance for NNN net lease retailers as e-commerce continues to disrupt retail overall, investors put premiums on properties with investment grade tenants.
NNN Big Box
Cap rates for the NNN net lease Big Box decreased by the tail-end of 2019. The decrease in cap rates can be primarily attributed to a general compression in cap rates for the entire net lease NNN trade market. In the last quarter of 2019, NNN single tenant Big Box investment properties were priced at a 1% discount to the overall average cap rates in the NNN net lease market. This exemplified a rising trend of increasing rates of return for Big Box properties. Moreover, properties with investment grade NNN tenants had a 1% cap rate premium over those without investment grade tenants!
Non-investment grade NNN Big Box properties with strong underlying real estate or below market rents, continue to excite interest from investors. Institutional investors looking to place large amounts of capital with higher returns, are targeting retailers that are growing their franchising segments. It is important to note that the NNN Big Box sector has been marked by large portfolio/sale leaseback transaction by popular tenants including Regal Cinemas, Bass Pro Shops, Albertsons, et al. As the Big Box retailer market continues to change, investors are carefully monitoring tenant financials and placing greater emphasis on the plasticity of underlying real estate fundamentals.
Statistics to note: the Top 5 NNN Big Box retailers are Whole Foods and TJ Max, with 500 stores and 1241 stores both with an A+ rating. Walmart has over 11,000 stores with an AA rating. Ross has 1483 stores and Home Depot has 2285 stores, both are A rated.
NNN Pharmacy
In 2019 the drug store sector experienced a 40% increase in NNN investment property transaction volume over the past 5 years. Average Cap rates for CVS and Walgreens NNN properties fell to 5.6% and 6.0% respectively. However, NNN Rite Aid properties experienced a 25 basis points increase to 7.5%.
Walgreens NNN properties experienced their first decrease in average cap rates in the recent past due to greater demands for financial transparency following Walgreen’s acquisition of over 2,000 stores from Rite Aid. While there is now a better understanding of Walgreens and Rite Aid stores, many investors continue to prefer CVS NNN properties because of a lower rent structure. However, the popularity of CVS, does not prevent investor skepticism about CVS assets since CVS does not disclose store level performance – in contrast to Walgreens and Rite Aid.
Statistics to note: Rite Aid NNN is trade at around 7.5% cap, whilst Walgreens go for 6.0% cap and CVS sell for 5.5% cap. For lease terms greater than 20 years, cap rates compress from 10 basis points to almost 100 depending on the NNN property brand. Short lease terms on the other hand see bumps of 2% to 4% in cap rates! Institutional Credit Ratings are highest for CVS BBB+, next is Walgreens at BBB, finally Rite Aid is rated B.
For more information on Big Box and Pharmacy triple net lease properties contact the experts at The Triple Net Investment Group today.