Sherwin-Williams stores have long been considered desirable real estate investments--and for good reason. The company has been around since the conclusion of the Civil War. Since then, it has grown to become one of the largest chemical, paint and coatings companies in the world. Besides its longevity, Sherwin-Williams’ debt is rated "A" (recently upgraded from "A-") by Standard and Poors (S & P). As a real estate investment, Sherwin-Williams retail properties possess many attractive qualities. They are viewed as very stable assets and are generally available at attractive price points--many under $1 Million. Further, the stores are typically located in stable markets at strong locations.
Despite these positives, Sherwin-Williams stores, as a real estate investment commodity, are somewhat difficult to quantify. If currently shopping for a Sherwin-Williams store to add as a last minute stocking stuffer, one might find offering capitalization rates in a range of anywhere from 6% to 10%. This wide range creates somewhat of a schizophrenic trading environment if trying to accurately value a Sherwin-Williams asset. It then becomes somewhat difficult for buyers and sellers to agree upon fair prices and capitalization rates for the investments.
"The stores have a very high lease renewal rate," said one investor, justifying the lower cap rates observed in the marketplace. "I've been told that Sherwin-Williams renews something like 97-98% of store leases," he said. Another factor that seems to drive Sherwin-Williams cap rates lower is the overall scarcity of product. The company does not operate as many stores as many retailers so the universe of potentially available properties is somewhat smaller. Beyond this factor, relatively few of the stores in existence ever come to the market.
While these factors might explain the low end of the cap rate spectrum, they do little to explain the higher end. After all, the lease renewal rates of the stores, very favorable S & P rating, and product scarcity should keep the cap rates of Sherwin-Williams stores down in the 6-8% range. But what explains those stores offered at 8%+?
"I think the (cap rate) diversity can be explained by looking at the wide range of real estate choices found among Sherwin-Williams properties," said another Sherwin-Williams investor. Indeed, this may explain much. It is estimated that approximately 2/3 of the business done in a typical Sherwin-Williams is from contractor sales. Consequently, some Sherwin-Williams stores may not be located at "Main and Main." Since for many Sherwin-Williams is a destination, in some cases the company's stores may thrive in convenient but not necessarily first tier locations. Some of these stores may be located in even what would be considered quasi-industrial locations, rather than trophy retail locations. Whereas retailers such as Walgreen's, Wal-Mart, etc. have no room for error in their real estate decision-making, Sherwin-Williams may in fact be able to survive and thrive with some sub-standard locations due to their reliance on contractor and other non-impulse customers. Such locations, however, may end up being penalized in the net lease marketplace from investors unwilling to buy what they would consider to be inferior locations at low cap rates.
Other factors that might balance out the favorable investor sentiment for Sherwin-Williams properties are the shorter-term and double-net nature of the company's leases. Typically the base term on the company's leases are 10 years and typically the landlord with have modest responsibilities with grounds maintenance, roof, and structural. These factors undoubtedly scare off some investors which might pay lower cap rates otherwise. It has undoubtedly kept many institutional investors away from the product.
Although difficult to pigeon hole as an investment commodity, Sherwin-Williams stores still provide an excellent investment choice for the smaller commercial real estate investor. Many can be purchased at excellent costs per square foot and at reasonable capitalization rates. Although one must evaluate the real-estate specific characteristics of each offering carefully, the eventual Sherwin-Williams investor should be rewarded with a long-term, stable tenant for years to come.
