December 3, 2013 by Brian Rogal
CHICAGO—The economic recession may have hit middle-market retailers hard, but many outlets serving cost-cutting consumers thrived, and remain very attractive to investors.The Boulder Group, for example, a net leased investment brokerage firm located in suburban Chicago, has just released a report that shows cap rates for the top net leased dollar store brands have fallen since the third quarter of last year.
“Properties tenanted by Dollar General, Dollar Tree and Family Dollar experienced cap rate compression of 99, 35 and 28 bps respectively,” Boulder found. “Despite the significant cap rate compression, the sector was still valued at a 73 bp discount to the entire net lease retail market. This is primarily due to dollar store’s tendency to operate in secondary and tertiary markets.” The compression has occurred during a historic year for single tenant net leased products in general, with cap rates sinking to lows not seen in years.
Cap rates for Dollar General stores sank from 8.25% to 7.26%, falling below the 7.75% for Dollar Trees and the 8.00% for Family Dollars. Boulder officials attribute this to Dollar General’s tendency to sign 15-year leases that relieve landlords of all responsibilities, a big bonus for 1031 exchange investors. By contrast, Family Dollar typically signs 10-year double net leases, and Dollar Tree also signs double nets for 10 years or less.
“Dollar stores remain a popular option for investors as they primarily offer long term leases to strong credit tenants at an attractive price point,” the Boulder study noted. “Additionally, with rapid expansion plans, the supply available within this sector when compared to other net lease tenants is abundant.”
“Although there is increased demand for the entire sector, newly constructed dollar store properties are in the highest demand,” Boulder added. “Dollar store properties built after 2012 are priced at a 100 bp premium over the entire dollar store market.”
The firm projects that the supply for new dollar stores will continue to increase. Developers should put the finishing touches on over 1,400 stores by the end of 2013. However, some investors have become concerned that all the building of dollar stores during the recession and its aftermath may saturate the market.