Institutional Buyers Hit Pause on Dollar Stores
Dollar stores proliferated across the US as the economy sank into a recession, but instead of tapering off, demand for the sector’s cheap goods increased after a recovery took hold.
CHICAGO—Dollar stores remain one of the few portions of the retail sector impervious to e-commerce, and that attracts both developers and investors. But after several years of energetic buying, institutional investors have backed off, according to The Boulder Group’s new report on the net lease dollar store sector. The pause should open up opportunities for others, especially since builders have maintained a robust pace of new construction.
The average cap rate in the net lease dollar store sector, defined as free-standing Dollar General, Dollar Tree and Family Dollar properties, increased 35 bps to 7.10% over the past year, Boulder found. That rate is now 90 bps higher than the second quarter retail net lease rate of 6.2%. The company attributes the rise to a significant cap rate increase for Family Dollar properties because of a substantial decline in the average remaining lease term for these stores.
“If you’re in great demand, which this sector is, you can be more aggressive in negotiating lease terms,” Randy Blankstein, president and founder of Wilmette, IL-based Boulder Group, tells GlobeSt.com, and as the remaining lease terms decrease, whether at Family Dollar or other properties, buyers seek increased yields to cover potential risks associated with shorter remaining lease terms.
During the year, the median asking cap rate for Family Dollar stores increased 61 bps to 7.31%. Cap rates for Dollar General stores increased half that amount, 30 bps, to 7.05%, while the increase was even less, 12 bps, for Dollar Tree stores to 7.02%.
According to John Feeney, senior vice president and head of research for Boulder, these three tenants represent the largest presence within the sector and account for approximately 29,600 stores across the country.
“The momentum in retail is clearly on the side of smaller stores,” Blankstein adds. “Not many people want to spend three hours in an enclosed mall looking for things.” Dollar stores allow quick visits, and that makes their business model “sustainable at a time when e-commerce is reaching into the big box space.”
Dollar stores proliferated across the US as the economy sank into a recession, but instead of tapering off, demand for the sector’s cheap goods increased after a recovery took hold. “They have proven themselves in better times,” Blankstein says.
That led many institutional buyers into the sector. “They were some of the most active buyers in the last few years.” But about one year ago, that acquisition spree slowed down considerably, largely because the big players reached pre-set limits on their exposure.
However, Blankstein says it’s only a matter of time before such acquisitions begin again. “By 2020, institutional buyers should be back into the market.”
And that should create some opportunities. With institutional buyers temporarily absent from the scene, private and 1031 investors will find more favorable pricing and “pick up properties at a discount to some extent.”
Other factors contributing to the upward pressure on cap rates in the dollar store sector include an active construction market. Since second quarter 2017 the supply of dollar stores increased by 12%. Construction in the sector remains strong, and Boulder expects similar increases in inventory for the foreseeable future.