Why Investors Love This Little-Known Net Lease Property Type

Mar 21, 2018

Looking for a net lease property, but finding it hard to compete with dozens of other hungry investors eager to own a trophy property?

Take heart, because there’s one asset type that though less flashy, provides great returns even during market downturns.

They’re called auto parts stores, and they’re probably one of the industry’s best-kept secrets.

Automotive Parts Stores Do Well During Economic Downturns

Auto parts stores do well during economic downturns

Most businesses in the retail net lease family are affected to some extent by market downturns.

Though this risk can be minimized by choosing industrial grade tenants, there are few asset types, other than dollar stores, that are relatively impervious to economic fluctuations: there is always a need for vehicle repair.

The automotive sector, which includes auto parts, tires and oil change stores, on the other hand, do even better during harder times, as consumers seek to repair vehicles on their own in order to save money.

Consumers are also keeping cars longer, thus requiring replacement car parts more frequently. This has opened up more opportunities for businesses that cater to the DIY market as well as offer their own “do it for me” services.

Discount automotive part stores may do well in harder economic times as consumers are forced to attempt self-repairs that otherwise would have been handled by dealers or independent mechanics.

Auto Parts Retailer That Are Doing Well

The main contenders for best in class are AutoZone, Advance Auto Parts, and O’Reilly Auto Parts, with AutoZone the most highly recommended retailer. Advance Auto Parts, the No.2 retailer, had a difficult time in 2017 and was plagued by market share loss and restructuring efforts that did little to increase growth. O’Reilly is in third place, and with its strong network of distribution centers and hub, stores have plans for expansion, with an estimated 190 new stores expected to open in 2018.

AutoZone has a credit rating of BBB from Standard and Poor, while O’Reilly and Advance Auto Parts have a rating of BBB+ as a BBB- respectively. All offer cap rates between 5.45% and 7.67% and are reasonably priced, with an average cost of $1.6 million. Auto parts stores are also generally located in prime locations with high traffic.

Jiffy Lube, which offers reasonably priced automotive repair, tune-up, and maintenance service and has a credit rating of AA, has also proven to be a good investment property as long as you ensure the parent company backs up the lease.

Typical Lease Terms For Auto Parts Retailers

Leases generally range from 10 – 20 years, and are either double or triple net with renewal options beginning at five years. Escalation clauses are common, with a bump of 1-3% per year.

These are excellent terms for investors, however, it’s still a good idea to make sure you choose a corporate-backed vs franchise-backed lease.

Auto Parts Stores Adapting to E-Commerce Competition

auto parts stores adapting to e-commerce competition
As with many retail businesses, e-commerce competition is a concern for auto parts stores as well. Commercial sales and deliveries make up 30% of all of AutoZone’s sales, while Advance Auto Parts and O’Reilly derive 50% of revenue from commercial trade.

In order to stay competitive, all three companies have enacted several changes to their brick and mortar and online properties. They’ve added numerous mega-hubs, which allow them to stock more strong-selling products and get them quickly to customers at one of their brick and mortar stores.

In addition, though Amazon has expanded into the auto parts industry, the e-commerce giant still compete in terms of delivery times. Auto parts stores, on the other hand, can get parts to an auto-mechanic in just two hours, or even 30 minutes for a customer stranded with a car on the side of the road.

Plus, with the increasing complexity of modern cars, the sheer number of parts required has skyrocketed; auto parts stores not only stock all the parts needed to make repairs, but even more importantly, are able to easily find the right part and get it quickly to customers.

And lastly, the top auto parts retailers have extensive data coverage on their target market, with over 20 years of numbers on car population demographics and break down rates in order to ensure customers find a given part within 5 miles of their present location.

Although at some point in the future auto parts retailers might decide to shut down smaller stores that lack the ability to offer pick-up services as well as function as retail stores, it is likely auto parts retailers will adjust by moving to larger format stores – as some have started doing already.

Looking To Buy Commercial Property?

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