CAP Rates have been suppressed but Attractive Price Points, Investment Credit Grade and Long leases make Dollar Store NNN attractive to investors
In this report I will be covering the single tenant net leased (NNN) dollar store sector, mainly Dollar Tree, Family Dollar and Dollar
General because they are the most acquired of the dollar store sector. CAP rates have been compressed in the third quarter of 2013, by 50 basis points, according to the Boulder Group. Overall in
the third quarter of 2013, Dollar General, Dollar Tree and Family Dollar all experienced cap rates suppression of 99, 35 and 28 basis points. This is due to that they primarily operate in secondary and tertiary markets.
Given the overall compressed cap rates in the retail net lease market, this market also suffers from lower lease terms, which is not to desirable. Dollar stores are not only strong credit rating tenants but but they offer longer lease terms at attractive price points.
Dollar General typically signs leases of fifteen years with no landlord responsibilities (NNN), making them a desirable option for a 1031 exchange investor. A key difference between Dollar General and Family Dollar, despite their investment grade rating, is that Family Dollar signs 10 year double net leases. Dollar Tree signs seven or ten year double net leases. The Dollar store sector overall, but especially Dollar General are few who laughed at the recession as profits increased in 2014
“With the dollar store sector entering its third year of explosive growth and most chains considering everything from inline space at shopping centers, to more and more freestanding locations, investors who have struggled to find available drug store or fast food product are increasingly looking to standalone dollar stores for their net leased deals despite the fact that most of the active chains are still inking deals for 10 years or less,” Garrick Brown, of Cassidy Turley added.
Increased new construction scheduled due to high demand
Dollar stores has experienced increased demand for new construction and been commanding a premium over asking cap. Dollar store nnn properties constructed after 2012 have been priced at a 100 basis points premium over the entire dollar store market. New construction has increased over 1,200 through 2013. The asking price average for dollar stores is $1,095,000 equating to a median price of $103 per square foot
Even with the uncertainty of the overall net lease market is fully known and over saturation of dollar stores is also a possibility, the dollar store net lease market will continue to increase in demand. As investors seek attractive price point properties with long leases and investment grade tenants, dollar stores remain a hot asset to own.
Asking Price to Closed CAP Rate spreads
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Source: The Boulder Group
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Dwaine Clarke is a published author and founder of Clarke & Tinker Net Leased Property Group, a commercial real estate sales and advisory firm located in Connecticut. Connect with Dwaine on Twitter and Linkedin