End of Year Review 2020 The Resilience of Single Tenant ...

End of Year Review 2020

The Resilience of Single Tenant Net Lease RetailU.S. Research Report | Single Tenant Net Lease Retail

As economic uncertainty loomed in 2020, investors began shifting focus to single tenant net leased properties in seek of greater financial security and less volatile investments.

While single tenant net lease assets typically

offer a lower average base rent and provide

fewer opportunities for rent increases than

traditional leases, the benefits of ownership

are enticing:

• Minimal Landlord Responsibilities

• Predictable, Stable, Long Term Cash Flow

• Quality Name Brand Tenants

• Better Financing Options

• Lower Acquisition Entry Cost

This report examines the performance of the

retail sector in 2020 and, more specifically,

analyzes five key segments of the single

tenant net lease arena:

• Casual Restaurants

• Quick Service Restaurants (QSR)

• Drug Stores

• Dollar Stores

• Auto Part Stores

Single Tenant Net Lease Retail | 2

2020 Retail Review While most industries experienced GDP contraction as the pandemic significantly impacted our ability to work and socialize, the retail industry was one of the hardest hit sectors with space contractions accelerated by a shift in consumer spending.

While the retail industry operated under cloudy skies, the growth of e-commerce was undoubtedly the silver lining for the sector. At the height of the lockdowns, an estimated 61.8% of all retail businesses were closed, accounting for 4.9 billion square feet. This prompted consumers to shift their spending online, compressing four years of growth into a single quarter, with e-commerce sales totaling 16.1% of all retail sales in Q2 2020.

Despite the financial uncertainty of consumers, 2020 holiday sales eclipsed 2019 sales as retailers strategically elongated the holiday shopping season. Amazon kicked things off in October with Prime Day. Other retail giants like Walmart and Target promoted a series of pre-Black Friday sales in response to their inability to draw large in-store crowds the day after Thanksgiving.

A Changing Retail Landscape• The retail industry was already in the midst of a

transformational change; COVID-19 just accelerated the timeline. In 2019, retailers in the U.S. announced more than 9,300 store closings, a 59% jump from 2018. In 2020, 15,874 stores closed and in 2021, that number will likely be higher.

• Compared to other countries, the U.S. is considered “over-stored.” Currently, the U.S. has 24 retail square feet per person — significantly more than Western Europe at just four square feet per person. U.S. retailers are expected to continue to trim or, in some cases, like Godiva Chocolate, eliminate their physical footprints altogether.

• As with every presidential change, new administrations must translate campaign promises into new policies. Therefore, many investors are anxiously waiting to see if Biden’s administration eliminates 1031 Exchanges for investors making more than $400,000; however, that move seems unlikely given the narrow margin of control in the House and Senate. The role of Opportunity Zones is expected to expand under President Biden, so we anticipate increased attention in lower-income areas. Furthermore, with a second


round of Paycheck Protection Program (PPP) loans approved and an additional stimulus package recently approved, landlords, tenants and consumers can begin to see light at the end of the tunnel.

• As expected, retail landlords took a financial hit in 2020, as rent collections in Q2 2020 plummeted to 61.3% from 91.1% in the first quarter. Throughout the year, national tenants were better suited to meet their lease obligations than regional and local tenants. While rent collections have not returned to pre-pandemic levels, overall rent collections climbed to 85.7% by year-end.

• Apart from e-commerce, building material & garden and grocery, all retail categories experienced double-digit declines in year-over-year sales. Not surprisingly, the Food Service & Beverage sector experienced the largest drop, at 30.1%. The trend toward working from home, coupled with the limited set of places to go and things to do, drove gasoline sector sales down 28.5%. Electronics & Appliances was the only other sector to post negative sales growth above 20%.

The resiliency of the net lease sectorHistorically, net lease assets have outperformed other investments during turbulent economic times, particularly those occupied by essential service-providing investment-grade tenants. These companies that provide vital products and services traditionally boast strong balance sheets and are typically locked into longer lease terms. With operating expenses covered by the tenant, single-tenant net lease investors sleep well knowing they have a reliable and consistent income stream, allowing them to be better positioned to weather economic storms. Thus, while 2020 was a year unlike any other, the single-tenant net lease market held up remarkably well.

Record high transactions reached in 2020Investment activity was down across all property types in 2020 as investors sat on the sidelines awaiting greater clarity. Still, the single-tenant net lease investment market outperformed many of the traditional property sectors, particularly those assets with a high-quality tenant and premium location. An intense flurry of net lease retail activity in the fourth quarter pushed the number of transactions to a record high of 2,415; however, larger deals were in short supply as total sales volume reached $6 billion, a 7.7% decrease over 2019.

Cap rate compression subsiding

2020 Retail Rent Collections

Five-Sector STNL Volume Drops, Despite Rise in Transactions

Retail Sales Growth - H2 2019 vs H2 2020

-30.1%-28.5%-27.9%

-17.7%-15.9%

-15.1%-15.1%-14.7%

-13.9%-10.4%-10.2%

-9.3%-1.2%

0.6%

-35% -30% -25% -20% -15% -10% -5% 0% 5%

Food Service & BeverageGasoline

Electronics & ApplianceGeneral Merchandise

Miscellaneous RetailersHealth & Personal Care

Total RetailFurniture

Retail Without GasolineMotor Vehicles & Parts

Sporting Goods & HobbyGrocery

Building Material & GardenE-Commerce

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 2020 Q2 2020 Q3 2020 Q4 2020

91.18%

61.35%

81.16%85.79%

Total Collections National Tenants Non National

New NormalPre-COVID COVID Crash Rebound

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 2020 Q2 2020 Q3 2020 Q4 2020

91.18%

61.35%

81.16% 85.79%

Total Collections National Tenants Non National

New NormalPre-COVID COVID Crash Rebound

0

500

1,000

1,500

2,000

2,500

3,000

$0.0

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$6.0

$7.0

2009

2010

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2015

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2019

2020

Bill

ions

5-Sector STNL Volume Drops, Despite Rise in Transactions

Five-Sector STNL Transactions Five-Sector STNL Volume


With a decline in sales volume in 2020, it would stand to reason that cap rates would begin to edge upward. While this was true for the retail industry as a whole, transactions across our five net lease sectors remained relatively stable throughout the year, increasing four basis points year-over-year. Although casual and quick service restaurants (QSRs) were impacted significantly by COVID-19, they remained more than 50 basis points lower than the Auto, Dollar and Drug Store sectors.

10-Year Treasury climbs, but spread remains significantThe 10-year Treasury rate dropped to 0.52% in early August but steadily climbed to 0.93% by year-end. While the spread between the 10-year Treasury and cap rates shrunk, a significant gap remains by historical standards, providing investors ample opportunity.


Spread Between 10-Year Treasury & Cap Rates

Cap Rates by Net Lease Sector

6.08%

6.83%6.48%

5.93%5.42%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Auto Dollar Drug Casual QSR

Cap Rates by Net Lease Sector

0

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900

0%

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4Q20

5-Sector STNL Cap Rate 10-Year Treasury Avg Spread (BPS) Spread (BPS)


Casual and fine dining restaurants have borne the brunt of the pandemic’s wrath. Since the onset of COVID-19, most operators were forced to shift their revenue reliance to outdoor dining, carryout and delivery services. While many have managed to tread water, an estimated 110,000 restaurants and drinking establishments have closed permanently due to the pandemic, according to the National Restaurant Association.

Restaurants began to see an uptick in sales around September, but a second wave of infections erupted as cooler weather settled in, triggering many municipalities to re-introduce seating restrictions. As a result, November year-over-year sales were down nearly 20%.

The past year notwithstanding, in the prior five years, the industry experienced a substantial period of revenue growth as chains expanded their operations and their economies of scale. Although 2020 revenue is projected to be down 39.2%, IBISWorld is projecting revenues to increase by 13.2% — once the pandemic is in the rearview — on an annualized basis through 2025.

Fast casuals will erode profitsWe expect fast casual restaurants to remain a popular dining alternative to traditional casual restaurant chains even after the nation becomes more confident about public health. With more and more fast casual operators offering healthier meals at affordable prices, fast casuals will continue to prosper at the expense of full-service and QSRs.

1,620 Units BBB

$450 Sales/SF

1,610 Units B+

$375 Sales/SF

876 Units BBB-

$580 Sales/SF

710 Units B+

$590 Sales/SF

Key Trends

Mandated seating capacity limitations and a reluctance by many consumers to dine inside continue to squeeze operators’ bottom lines.Restaurant employment has declined by 23% during the pandemic. Of the employees returning to work, many are doing so at reduced hours and often reduced pay.

Several major restaurant chains are expected to push operations to emerging economies abroad.

Total Industry Revenue

$ 83.9B Revenue

-9.1%Annual Growth 2015-2020

13.2%Annual Growth 2020-2025

Casual Restaurants

Tenant 2H 2020 YOY BPS Change

Applebee's 7.10% -10

Chili's 5.30% -40

Olive Garden 5.90% 20

Outback Steakhouse 5.90% 60

Avg. Casual Restaurant Cap Rate 5.93% 9

Tenant Address City State Sale Price Cap Rate

Outback Steakhouse

1101 Seminole Trl Charlottesville VA $5,057,426 -

Outback Steakhouse

3215 SW Sr 200 Rd Ocala FL $4,413,430 6.35%

Outback Steakhouse

6390 N Lockwood Ridge Rd

Sarasota FL $4,343,080 -

Applebee's975

University Blvd

Rexburg ID $3,465,000 7.58%


Restaurants (continued)

Investor activity returning to form After a disastrous second quarter, investment activity began to pick up steam towards the end of the year. While the number of transactions recorded in the fourth quarter of 2020 was about 30% below pre-pandemic levels, deal velocity is expected to continue to grow as investors begin to see through the pandemic fog.

Overall cap rates see little movementCap rates remained relatively stable when comparing the second half of 2019 to the same period in 2020, increasing a nominal nine basis points. Chili’s experienced a 40 basis point decline to 5.3%. Both Outback Steakhouse and Olive Garden witnessed a 60 and 20 basis point uptick, respectively, finishing the year at a 5.9% cap rate.

OutlookOperators are looking towards a more prosperous year in 2021. Although many restaurants permanently closed, consumers will continue to have plenty of dining options as the industry was a bit over-supplied to begin with. Revenues are expected to climb substantially throughout the year as consumers yearn to return to a sense of normalcy begin to dine-out more frequently once vaccinations become more widespread, and the fear of COVID-19 starts to fade. Fast casual restaurants will remain a threat to chain operators as consumers return to their active lifestyles, placing a premium on convenience and speed. Therefore, we anticipate that operators will continue to rely on their carryout and delivery services long after the pandemic ends.

While consumers have been forced to prepare and eat more of their meals from home over the past year, operators hope this will be a short-lived trend. However, with the growing popularity and convenience of companies that encourage and facilitate meal production at home, like Home Chef and Blue Apron, we expect the meal kit trend to continue, applying additional pressure on casual restaurant operators.

Historical Cap Rates

Notable Casual Sales

Historical Number of Transactions

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Quick Service Restaurants (QSR)

15,174 Units BBB+

$815 Sales/SF

13,773 Units BBB+

$715 Sales/SF

7,237 Units BB

$650 Sales/SF

6,976 Units BB

$415 Sales/SF

6,303 Units B

$540 Sales/SF

5,401 Units BB

$345 Sales/SF

3,948 Units BB

$420 Sales/SF

3,407 Units BBB-

$378 Sales/SF

2,916 Units BBB

$416 Sales/SF

2,585 Units BB

$455 Sales/SF

2,724 Units -

$885 Sales/SF

2,238 Units BB-

$600 Sales/SF


$ 240.1B Revenue

-0.1%Annual Growth 2015-2020


In most cases, QSRs were viewed as essential businesses and remained open throughout the early stages of mandated state shutdowns. While COVID-19 impacted QSR operators’ bottom lines in 2020 much like their casual and fine-dining cohorts, QSRs with drive-thru operations benefited tremendously. Analysts estimate that Americans conduct six billion drive-thru visits each year to more than estimated 200,000 drive-thru locations. Historically, 50-70% of QSR sales come from drive-thru lanes. Nevertheless, 2020 QSR revenues are estimated to decline by 13.8%.

A 2018 study by the Center for Disease Control (CDC) found that nearly 37% of U.S. adults consumed fast food on any given day. The International Food Information Council published a survey indicating that 43% of Americans look for healthy foods all the time, and 52% look some of the time. Yet, only 28% suggest that healthy options are easy to find.

Percent of Generations “Always” Looking for Healthier Foods

Key Trends

Shifting preferences towards healthier foods are causing menus to be re-imagined with keto, gluten-free, low-carb and meatless alternatives. COVID-19 is accelerating a building configuration renaissance, including smaller footprints, removing dining rooms and increasing drive-thru capacity.

Rising labor costs remain a top concern for most operators, and the shift towards automation has begun.

Dietary needs have evolved over the last decade, with consumers, particularly Millennials and Generation Z, migrating towards a more health-conscious lifestyle. As a result, many QSRs have been trying to find the right menu balance of traditional favorites with healthier options and those that do, stand to benefit the most.

45%51%

45%38%

0%

10%

20%

30%

40%

50%

60%

Gen Z Millennials Gen X Baby Boomers

Percent of Generations "Always" Looking for Healthier Foods


Carl's Jr.1670 W

Pacific Coast Hwy

Long Beach CA $10,000,000 -

Starbucks 1101 S Harbor Blvd Fullerton CA $6,200,000 3.63%

Jack in the Box

34297 Pacific Coast Hwy Dana Point CA $5,775,000 4.15%

Pizza Hut 1397 W Lane Ave Columbus OH $5,000,000 -


Quick Service Restaurants (continued)

Automation is on its wayTechnological efficiencies will be a core focus of top brands moving forward. Much of the QSR business model’s success is that their business is broken down into standardized and repetitive tasks that spur operational efficiency. As a result, the runway for technological advances appears limitless for an industry where roughly three quarters of the positions have the potential to be automated.

Technological advancements have been slow to propagate through the restaurant industry as smaller operators cannot justify the expense. But as labor costs continue to rise, the shift towards modernization will pick up steam, with kiosks, mobile payments, voice and digital drive-thru ordering systems being just the tip of the iceberg.

Sales activity returns to pre-pandemic levelsIn less than a year, the number of transactions plummeted from a peak of nearly 300 transactions in Q4 2019, to just over 100 sales by Q2 2020. During the last half of 2020, hungry investors looking to place capital with greater clarity regarding the pandemic, pushed the number of transactions over 250 sales during the fourth quarter.

Cap rate compression levels offOverall cap rates remained relatively stable year-over-year, declining 15 basis points to 5.4% from Q4 2019 to Q4 2020. Pizza Hut’s cap rate decreased by 150 basis points to 6.1%, as the company shuttered over 1,700 underperforming stores as part of its shift towards an off-premise model. Meanwhile, Popeye’s posted a 50 basis point year-over-year increase in the fourth quarter to 5.6%.

Notable QSR Sales

Colliers Sales SpotlightTaco Bell 39056 Winchester Rd, Murrieta, CA 92563 Sale Price: $2,972,500 Price PSF: $1,032.12

Jack in the Box 3058 W Clinton Ave, Fresno, CA 93722 Sale Price: $2,550,000 Price PSF: $972.54

Burger King 1830 E Main St, Woodland, CA 95776 Sale Price: $1,800,000 Price PSF: $701.75

Total Transactions

Tenant 4Q19 4Q20 BPS Change

Arby's 6.20% 6.10% -10

Burger King 5.80% 5.90% 10

Carl's Jr./Hardee's 5.19% 5.18% -1

Chipotle 4.40% 4.50% 10

Jack in the Box 5.20% 5.50% 30

KFC 5.70% 5.40% -30

McDonald's 4.20% 4.45% 25

Pizza Hut 7.60% 6.10% -150

Popeye's 5.10% 5.60% 50

Starbucks 5.30% 5.20% -10

Taco Bell 5.70% 5.10% -60

Wendy's 5.80% 5.40% -40

Fast Food/QSR 5.52% 5.37% -15


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-

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1

1

1

1

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Total Transactions


Quick Service Restaurants (continued)

OutlookWith consumer spending growth projected to hover just below 3.8% annualized over the next five years, ample opportunity for revenue growth awaits QSRs. Consumer demand for QSRs is projected to increase, but QSRs will face stiff competition from expanding operators, new QSR entrants and fast casual restaurants carving into their customer base. IBISWorld is projecting revenue growth to increase by 5.9% annualized to $320.4 billion through 2025.

Labor costs will remain a top concern among operators. According to a recent National Restaurant Association survey, 59% of operators indicated that their total labor costs – as a percentage of sales – are higher than before the pandemic. President Biden is attempting to pass a sizeable stimulus package that would benefit restaurants. However, while the proposed bill also calls for a minimum wage hike to $15 per hour, which would undoubtedly apply additional pressure to most operators’ bottom line, all indications point to the wage hike being removed from the final package. As a result, we expect to see a more concerted push towards automation in the coming years to mitigate rising expenses, primarily labor.

Despite a noticeable movement towards healthier dining options and a seemingly endless supply of new entrants into the already crowded field, QSRs will continue to be a staple of the American consumer and, consequently, remain an investor favorite.


Drug stores were thrust into the spotlight in 2020, as COVID-19 made health and wellness top of mind for everyone. A smaller building footprint and a unique mix of essential products benefited drug stores as consumers avoided larger stores and many other non-essential businesses were closed during the early stages of the pandemic.

With annual revenue growth of 2.7% projected through 2025, up from 1.6%, net lease investors remained bullish on the sector throughout 2020, setting a record for closed transactions in the third quarter, only to be broken again in the fourth quarter.

By 2030, all baby boomers have reached 65 years of age. As a result, demand for pharmaceuticals is projected to soar as individuals ages 65 and older take four times the number of medications than those between ages 18 and 49, according to the Health Policy Institute.

Consolidations and store closings persistDespite a health climate conducive to drug stores, the industry continued to see consolidations and contractions as larger brands acquired smaller operators. Recently, ShopRite announced the closing of 62 pharmacies in the Northeast, with customers being directed to CVS locations for prescriptions. Walgreens announced the closing of 200 stores in August and CVS is positioned to close another 22 stores on the heels of closing 46 locations in 2019.

Record Activity in 2020Drug stores outperformed most other retailers in 2020 and, with investors seeking a safe harbor, demand for these stores surged. Over the last decade, in an analysis of the top five quarters in terms of total sales volume, the third and fourth quarters of 2020 placed third and fifth, respectively.

9,227 Units BBB

$810 Sales/SF

9,941 Units BBB

$720 Sales/SF

2,469 Units CCC+

$465 Sales/SF

Major Players as % Revenue

Key Trends

Smaller operators will struggle to compete with the major brands.

An aging population will increase the demand for prescription medications.

Managed care organizations will place downward pressure on drug reimbursement costs as the number of people with private health insurance declines.

Drug Stores

35%

29%

5%

31%Walgreens

CVS

Rite Aid

Other


Drug Stores (continued)

Notable Drug Store Sales

Colliers Sales SpotlightCVS 9628 Rosedale Hwy, Bakersfield, CA 93312 Sale Price: $9,180,000 Price PSF: $622.63

Rite Aid 4530 N 5th St, Philadelphia, PA 19140 Sale Price: $5,225,000 Price PSF: $353.76

Walgreens 183 E Dayton Yellow Springs Rd, Fairborn, OH 45324 Sale Price: $4,100,000 Price PSF: $282.95

OutlookPharmacies and drug stores face a surging supply of competition from discount stores, warehouse clubs and mail order providers. However, Amazon’s recent rollout of Amazon Pharmacy could be the most disruptive of them all due to its extensive online presence and streamlined delivery platform. In response, look for a continued trend of mini-clinics opening within stores, as drug stores attempt to be a one-stop-shop for patients.

According to the National Association of Chain Drug Stores, nearly everyone in the U.S. lives within a five-mile radius of a drug store. As a result, acquisitions are expected to be the revenue growth vehicle of choice moving forward as the number of untapped markets declines.

Demand will remain strong in 2021, but investors will continue to be selective, favoring stores with premium locations and generous lease terms remaining.


Sales Transactions & Volume

Year-Over-Year Price/SF

Cap rate compression continuesStrong demand pushed overall cap rates down by more than 50 basis points from the previous year to 6.5% during Q4 2020. All three brands experienced rate compression. Walgreens experienced a 90 basis point year-over-year decline, with CVS bringing up the rear posting a 50 basis point decline.

$354

$248

$398$367

$265

$354

$0$50

$100$150$200$250$300$350$400$450

CVS Rite Aid Walgreens

Year-Over-Year Price/SF

4Q 2019 4Q 2020

Tenant 4Q19 4Q20 BPS Change

CVS 6.20% 5.70% -50

Rite Aid 8.30% 7.70% -60

Walgreens 7.40% 6.50% -90

Drug Store Cap Rate 7.00% 6.48% -52


Rite Aid 1841 N Western Ave Los Angeles CA $18,500,000 3.20%

CVS61-15

Metropolitan Ave

Ridgewood NY $17,000,000 5.05%

CVS 1165 W El Camino Real Sunnyvale CA $12,632,038 -

Walgreens 101 E Lake Mead Dr Henderson NV $11,347,000 6.07%

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As a result of the pandemic, consumers faced limited shopping options; however, most dollar stores remained open as they were deemed an essential business. Given that the industry’s value proposition flourishes during recessionary periods as price-sensitive consumers look to stretch their dollars, dollar stores grew in 2020.

The year’s activity was robust, with deal velocity gaining significant momentum as the year progressed and investors viewed dollar stores as a safe haven. While total sales volume was just over $25 million shy of the $923 million record set in 2019, the total number of transactions increased by 16% year-over-year.

Geographic expansion key to growthDespite controlling 61% of total revenue, Dollar General and Family Dollar will continue to push their geographic footprint through mergers, consolidations and new construction, and are projected to increase their market share over the next five years.

Activity reaches record highTotal deal velocity eclipsed 675 transactions in 2020, establishing a new high-water mark. While sales volume failed to follow suit, the volume recorded in Q3 2020 was the second-highest total quarter at $289 million (Q4 2019 was number one at $388 million) since 2010. The fourth quarter of 2020 tallied $245 million in sales, good for ninth place.

16,278 Units BBB

$190 Sales/SF

15,288 Units BBB

$160 Sales/SF


$ 91.5B Revenue



Key TrendsLarger operators are expected to outperform small chains that cannot benefit from economies of scale and reliable supply chains, resulting in additional consolidations. Product mix portfolios are expected to increase as the expansion into groceries and healthcare allow dollar stores to compete more effectively with discount retailers.

The customer base is expanding into the suburban middle- and upper-class as stores begin to carry more name brands.

Dollar Stores

Major Players by % Revenue

51%42%

7%

Dollar General

Family Dollar

Other

Sales Transactions

271

2873

372355

31 58

444

0

100

200

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400

500

Dollar General Dollar Tree Family Dollar Dollar Stores

Sales Transactions

H2 2019 H2 2020


Overall Cap rates continue decentRolling average cap rates over two quarters declined in Q4 2020 to 6.8% overall, down 16 basis points from year-end 2019. Dollar General experienced compression of 25 basis points to 6.6% during the same period as they continue to remain an investor favorite. Family Dollar trended the other direction increasing 45 basis points to 7.4%.

Dollar Stores (continued)

Cap Rate Comparison

Colliers Sales SpotlightDollar General 35 Murabella Pky, Saint Augustine, FL 32092 Sale Price: $1,996,000 Price PSF: $219.34

Dollar General 2110 International Speedway Blvd, Deland, FL 32724 Sale Price: $849,677 Price PSF: $200.09

Dollar General 525 E University Blvd, Melbourne, FL 32901 Sale Price: $736,507 Price PSF: $190.82

OutlookAfter posting 4.1% revenue growth between 2015-2020, growth is forecasted to decline to an annualized rate of 1.6%, reaching $98.8 billion in 2025. National chains will continue to expand their geographic reach via new construction and acquisitions. The number of establishments grew at an annualized rate of 3.1% during the same time period. Looking forward, the growth rate is projected to dip to an annualized rate of 2.4% through the end of 2025.

Because of their ability to prosper during periods of growth and retraction, dollar stores will remain an investor favorite due to their resilience in fluctuating market conditions. Demand for well-positioned stores with proximity to large population centers will continue to remain the most sought after.

6.90%

7.20%

6.90% 6.94%

6.60%

7.50% 7.60%

6.83%

6.00%6.20%6.40%6.60%6.80%7.00%7.20%7.40%7.60%7.80%

Dollar General Dollar Tree Family Dollar Avg. Dollar Store CapRate

CAP Rate Comparison

4Q 2019 4Q 2020

Notable Dollar Store Sales


Dollar General

25720 Fairview Ave Hemet CA $3,477,384 6.04%

Dollar General

315 S Montesano

StWestport WA $2,638,338 4.95%

Family Dollar 525 Orchard St New Bedford MA $2,557,000 -

Dollar Tree 6701 Market St Upper Darby PA $2,325,000 7.16%


Key Trends

Competition from local car repair shops and e-commerce retailers will apply additional pressure on store operators.

Although major players are gaining market share, steel price volatility is squeezing profitability.

Many independent retailers are re-positioning their focus by stocking hard-to-find and specialized parts.


$ 62.7B Revenue



While most auto part stores were deemed essential businesses and re-opened after the initial shutdown, consumers scaled back their driving activity considerably during the early stages of the pandemic, temporarily decreasing the demand for auto parts.

As more and more people return to work and with mass transit currently scaled back in many cities, consumers are now putting more miles on their cars, which bodes well for the industry.

Overall, the industry experienced revenue growth of 0.4% in 2020, as sales were funneled away by e-commerce retailers during the pandemic’s initial stages. As per capita disposable income and the average age of vehicles are projected to rise over the coming years, annualized revenue is projected to increase by 1.7% to $68.3 billion by 2025.

Technological adaptation remains slowThe auto part industry, by and large, has been slow to embrace technology. With the proliferation of e-commerce, many smaller operators struggled to establish an online presence, forcing them out of the industry. Many of the larger operators have begun to upgrade their inventory management to meet the changing needs of more technologically advanced automobiles and point of sale systems, and some are even experimenting with in-store kiosks to look up parts. AutoZone now retails equipment for various cell phones, GPS systems and audio devices. This trend is expected to continue as motor vehicles continue to become more technologically advanced.

Sales activity volatilityOn the surface, it appears that sales volume took a nosedive in the first quarter of 2020 as the pandemic began to make itself known. Although volume dropped considerably from Q4 2019, both the number of

Major Players as % of Revenue

5,885 Units BBB

$280 Sales/SF

5,439 Units BBB

$255 Sales/SF

4,262 Units BBB-

$235 Sales/SF

Auto Part Stores

18%

18%

15%

49%

AutoZone

O'Reilly Automotive

Advance Auto Parts

Other


Colliers Sales SpotlightO’Reilly Auto Parts 4872 Port Royal Rd, Spring Hill, TN 37174 Sale Price: $2,730,000 Price PSF: $364.00

AutoZone 1935 N Hollywood Blvd, Las Vegas, NV 89156 Sale Price: $2,727,358 Price PSF: $361.19

O’Reilly Auto Parts 5031 Dorchester Rd, Charleston, SC 29418 Sale Price: $2,447,271 Price PSF: $342.28

OutlookAutoZone has grown organically by about 200 stores per year over the last several years, 2020 notwithstanding. O’Reilly experienced similar growth but did so via acquisitions. We see large operator expansion continuing. Between 2020 – 2025, operators are projected to expand their footprints, with a projected growth rate of 0.9%.

Large operators who benefit from national advertising and stabilized and cost-effective distribution channels are expected to see above-average growth at the expense of smaller and local operators. Besides a more extensive product selection, price-sensitive customers will likely seek more significant discounts offered by e-commerce retailers and national chains.

Although the number of motor vehicle registrations is projected to grow by 10% over the next five years to 296 million, the increasing sophistication of cars makes it harder for the average person to conduct their own repairs. When coupled with the increased demand for electric vehicles, demand for retail auto-parts is likely to decline over the long run.

Notable Auto Part Stores Sales


Auto Part Stores (continued)

transactions and sales volume followed a similar pattern exhibited over the past half-dozen years of a surge in year-end sales, followed by a steep decline in the first quarter. 2020 was no different, and by the fourth quarter, sales activity fell just two transactions shy of the number of transactions posted in Q4 2019.


Summer rise in cap rates, retreatsAlthough there was some upward movement on cap rates during the summer, Advance Auto was the only company that did not register a year-over-year decline, as its cap rate increased by 20 basis points. Overall, the sector recorded a 15 basis point decrease, which underscores this sector’s resiliency to prosper regardless of economic conditions.


O'Reilly Auto Parts

1220 E Vista Way Vista CA $4,465,000 5.33%

O'Reilly Auto Parts

240 Chester Ave Bakersfield CA $3,459,091 4.90%

Advance Auto Parts 502 N Polk St Pineville NC $2,937,132 5.00%

AutoZone 22942 Los Alisos Blvd Mission Viejo CA $2,749,691 -

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Advance Auto Parts AutoZone O'Reilly

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Advance Auto Parts AutoZone O'Reilly

7.05%

5.70%5.35%


As the new administration solves for the struggling vaccination rollout and begins to amplify the inoculation pace, the country will slowly become more confident in its ability to mitigate the pandemic. Throughout that progression, we expect the retail industry to benefit as consumers accelerate their return to normalcy and release their pent-up demand for shopping, dining, entertainment and traveling, which has been building for nearly a year.

We expect to see a moderate uptick in consumer activity towards the latter half of the second quarter, which will carry forward well into 2022. Investment activity is anticipated to follow suit as we look for the last half of 2021 to be robust.

The 10-year Treasury rate nudged above 1% in January 2021 for the first time since last March as investors adjusted for higher government spending under the new administration. Yields are increasing on expectations of another round of stimulus relief and the belief that the Federal Reserve will not inhibit rising interest rates over the short run. Nevertheless, investors should continue to receive higher leveraged returns by historical standards.

Deal volume is expected to remain active as the gap between buyer and seller expectations narrow. Additional cap rate compression can be expected, but it will be dependent on the quality of tenant, building location and industry sector.

SourcesDatex Property Solutions, US Census Bureau, GlobalData, IBISWorld, CoStar, Real Capital Analytics, Healthy Policy Institute, Federal Reserve Bank, joebiden.com, Statista, S&P Global Rating

Single Tenant Net Lease Outlook

The quality and creditworthiness of a tenant has always been a priority for investors. Now more than ever, those attributes will be at the forefront of every investment decision. While there is a high level of certainty that the pandemic will be contained at some point, there is no guarantee that we won’t live through another pandemic or two in our lifetime. For this reason, essential businesses are expected to continue to command a premium over other non-essential business assets, and net leased assets with a reliable and stable cash flow will remain an investor staple.

This document has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, condi-tions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/or its licensor(s). ©2020. All rights reserved.

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Contacts

Anjee SolankiNational Director Retail Services | U.S.+1 415 288 [email protected]

Research contacts

Steig SeawardNational Director of Research | U.S.+1 303 779 [email protected]

Nicole LarsonResearch Analyst | U.S.+1 954 652 [email protected]

End of Year Review 2020 The Resilience of Single Tenant ...

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