Posted on GlobeSt.com | By Brian J. Rogal
Published September 3, 2015
CHICAGO—The economic recession may have hit middle-market stores hard, but outlets serving cost-cutting consumers thrived, and competition among investors to buy up the nation’s supply of dollar stores has continued to heat up, according to a new research report. The Boulder Group, a net lease investment brokerage firm located in suburban Chicago, found that cap rates for the top net leased dollar store brands have fallen even further since last year.
In its report, Boulder analyzes transactions involving free standing Dollar General, Dollar Tree and Family Dollar properties, as these tenants represent the largest presence within the sector. Since the second quarter of 2014, the average rate has compressed to just 6.5%, a decline of 50 bps. The most significant change occurred among Family Dollar properties, which saw a 100 bps decline, much larger than Dollar General and Dollar Tree, which experienced only slight compression of 25 and 10 bps respectively.
“Family Dollar changed their lease to be more competitive with Dollar General,” Randy Blankstein, president of Boulder, tells GlobeSt.com. “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, making the properties more attractive to investors.
Dollar Tree Inc. acquired Family Dollar Stores Inc. this July in a $9.2-billion blockbuster deal. However, Dollar Tree stores only made up 8% of the total supply in the second quarter as Dollar Tree stores are more commonly located within strip centers, Boulder found. But all three brands have been expanding, creating “a market with a consistent and steady supply of new construction assets.”
“Dollar stores will continue to garnish demand from all investor classes as they remain one of the only viable alternatives to QSR restaurants with long term triple net leases priced below $2 million,” the report adds.
And although the cap rates in this sector have been consistently sinking for a long time, the rates may not have bottomed out. “As dollar stores trade at a 10 bps discount to whole net lease market,” Blankstein says, there is “slight room for further compression.”