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NREI Research Series
Part 4: The Wal-Mart Effect

Recent data suggests that the Walmart Neighborhood Market chain is driving down cap rates on net-leased big-box stores. An influx of new units in the fourth quarter of 2015 helped tighten cap rates in the sector by 63 basis points, according to an assessment by The Boulder Group. Net lease cap rates tightened by 25 basis points between the fourth quarter of 2014 and the fourth quarter of 2015.

It meant that for the first time since 2010 the big-box sector was priced at a premium to the entire retail net lease market, according to the research firm. And the sector owed much of its success to Walmart Neighborhood Markets. Store count increased by 200 percent in the fourth quarter, compared with the previous year, and the median asking cap rate for Walmart Neighborhood Market stores was 5.10 percent.

“The influx of Walmart Neighborhood Markets into the supply made up almost one quarter of the overall big-box market,” says John Feeney, director of research at The Boulder Group. “It really brought it down a lot over the past year. Walmart Neighborhood Markets is the one major, long-term new construction tenant out there, which is why their cap rate is so much lower than the others.”

Walmart’s influence on the sector doesn’t seem like it will wane anytime soon. There were 645 store locations in operation as of June 2015, according to data from Moody’s Investors Service. In its 2015 annual report, Wal-Mart said it expects to increase the count by between 240 and 270 units in fiscal 2016.

Of course, Walmart stores were not the only engine that powered net lease agreements in the fourth quarter and drove cap rates down. Hobby Lobby, the arts and crafts retail chain based in Oklahoma City, Okla., backfills a lot of existing space that other retailers vacate so that it can take advantage of lower rents.

Lifetime Fitness, LA Fitness, Lowe’s and PetSmart are among the companies that closed on big-box single tenant transactions in 2015.

TAGS: Net Lease News
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