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Dollar Stores Remain Popular With Investors, Consumers

CHICAGO—Cap rates for this sector remain near the lows reached about one year ago, and providers have very active development pipelines.

By Brian J. Rogal | brianjrogal | | Updated on August 30, 2016

 

chi-dollar general A Dollar General Corp. store in Creve Coeur, IL.
CHICAGO—The US dollar store sector has continued to expand in the past year due to consumers’ demand for low-cost goods. That expansion has also opened up a lot of opportunities for investors that want to jump into this robust segment of retail. Cap rates for single tenant net lease dollar stores increased by 15 bps from the second quarter of 2015 to the second quarter of 2016 to a 6.65% cap rate, according to a new report from the Boulder Group , a net lease firm in Northbrook, IL. In its report, the company examined recent sales of free standing Dollar General , Dollar Tree and Family Dollar properties, as these tenants represent the largest presence within the sector. Cap rates for Family Dollar assets remained unchanged at 6.5%, while Dollar General and Dollar Tree experienced increases of 10 and 15 bps each, to 6.6% and 7.0%, respectively. Each of these tenants has expansion plans, so a strong pipeline of new construction assets should remain.   “The demand is being driven by retailers’ desire for smaller locations that are closer to the customer base,” Randy Blankstein , president of Boulder, tells GlobeSt.com. “The dollar stores small store format is able to serve secondary and tertiary markets that currently have a lack of national retail options.” Furthermore, “growth in the net lease market comes from many tenants in the discount retailer sector. In addition to dollar stores, some of the names expanding include Aldi , Ross , Goodwill and TJ Maxx .”  Dollar General and Family Dollar continue to make up the majority of the supply in the single tenant dollar store sector with Dollar General leading the supply with 62% of the sector. Dollar Tree stores only made up 7% of the total supply as these outlets are more commonly located within multi-tenanted assets. In the second quarter of 2016, the discount associated with net lease dollar store assets when compared to the net lease retail sector widened by 37 bps. “A contributing reason for the increase is many large institutional buyers previously acquired a significant number of dollar stores and reached their capacity,” the report notes. And “many lenders have filled their dollar store allotment and are not offering the same financing options as other net lease assets. “ But dollar stores remain attractive to 1031 and private investors as they offer long-term leases with low price points. Recently, for example, Family Dollar changed its lease structure to be more competitive with Dollar General. Formerly, new construction Family Dollar leases were 10 years, double net and did not contain rental escalations in the primary term. But the new standard lease is 15 years, triple net and contains a series of rental escalations. And in the second quarter of 2016, the median asking price for the net lease dollar store sector was just $1.36 million.

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