By Globe St. Wednesday, April 18, 2015

Why Buyers are Eyeing Auto-Parts Stores

IRVINE, CA—Tenants’ commitment to the location is one reason why auto-parts stores are the most sought-after among 1031 buyers, Hanley Investment Group’s SVP Jeremy McChesney tells GlobeSt.com exclusively. McChesney says single-tenant, net-leased auto-parts stores are a viable alternative retail investment to fast-food and bank single-tenant net-leased investments and are becoming a hot new sub-category in this arena.

“Transaction volume in the auto-parts sector should remain strong through 2015, since investors have a positive outlook of the fundamentals of the auto-parts industry,” McChesney tells us exclusively. “Existing properties with extensive history and newly minted long-term leases should continue to be in the highest demand. Auto-parts store properties with shorter lease terms located in areas with strong real estate fundamentals also remain in high demand.” He adds that investors want to acquire auto-parts stores for their residual value since they are typically constructed as vanilla boxes, which are easier to re-tenant in the event the tenant vacates.

In the last 10 months, McChesney has negotiated the sale of five single-tenant net-leased O’Reilly Auto Parts stores with an average cap rate of 5.62%. He recently represented both the buyer and the seller of a single-tenant net-leased O’Reilly store at 548 Grass Valley Hwy. in Auburn, CA, which sold for $2.6 million, representing a 5.31% cap rate—one of the lowest cap rates for an O’Reilly Auto Parts store to close in 2015, according to CoStar. The single-tenant absolute triple-net store had 12 years remaining on the primary term of the lease. The other O’Reilly sales that McChesney closed were located in Montrose, CO; Texarkana, TX; Fort Payne, AL; and Evansville, IN.

“Due to our national network of investors and effective marketing strategies, we have been able to outperform the market for the sale of O’Reilly Auto Parts stores by nearly 60 basis points,” says McChesney.

In the same 10-month period, McChesney closed four single-tenant net-leased AutoZone stores with an average cap rate of 5.78%. The properties are located in Raleigh, NC; Minooka and St. Louis, IL; and Fort Wayne, IN. “We have also been able to outperform the market for the sale of single-tenant net-leased AutoZone stores by nearly 30 basis points,” says McChesney. “The national AutoZone average closing cap rate for 2014 was 6.06%.”

McChesney says the auto-parts store category continues to do well because many Americans are holding onto their cars longer. “The average age of cars and trucks in operation in America hit a new all-time high of 11.4 years, up slightly from 11.3 years in 2013, according to a study by IHS Automotive, whichforecasts that the average age of vehicles will rise to 11.7 years by 2019.”

Not only is the average vehicle in America getting older, but the study also found that the country has a record number of vehicles in operation as the total topped 252.7 million in 2014, an increase of 3.7 million vehicles from 2013, McChesney says. “The continued increase in the number of older vehicles explains why after-market auto-parts retailers like O’Reilly and AutoZone have done so well in the last few years.”

McChesney also reports that as there are limited investment-grade options priced below $2 million outside of dollar stores and quick-serve restaurants, auto-parts store properties remain in high demand among savvy net-lease investors, but values are quickly increasing.

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