Net Lease Auto Sector Outperforms Market

Cap rates for the single tenant net leased auto sector decreased by 49 basis points from the fourth quarter of 2020 to the fourth quarter of 2021 to 5.40%. The auto sector, for the purpose of this report, consists of various auto related tenants in the parts, service, and collision sectors. The primary reason contributing to the decrease in cap rates was caused by overall market conditions in the net lease sector with increased demand. Over the course of 2021, the net lease retail sector experienced cap rate compression resulting in a 12 basis point decline.

Supply in the net lease auto sector primarily consists of auto parts retailers (49%). Development and tenant expansion in this category lagged historical standards which lead to an average remaining lease term of less than 9 years for the auto parts sub-sector. Both the auto service and collision sub-sectors had an average remaining lease term in excess of 12 years in the fourth quarter of 2021. The auto service sub-sector represents the lowest cap rates in the net lease auto sector.?

The supply chain constraints and chip shortages increased the length of car ownership, benefiting the auto parts and auto service sectors. The current vehicle fleet in the United States continues to age, providing investors with further confidence in the auto parts and auto service sectors. According to IHS Markit, the typical age of a vehicle on the road is more than 12 years old – representing an all-time high.

Transaction volume in the auto sector should remain similar to 2021 as investors continue to seek properties with strong tenants in the price range this sector provides. Competition for new construction properties with long term leases will remain, especially amongst 1031 investors. The net lease auto sector will garner investor interest ranging from private investors to institutional/REIT investors.?