Net Lease Investors Still Value Dollar Stores

Asher Wenig Photo courtesy of Stan Johnson Co.

The dollar store sector, in recent years, has been a popular choice among net lease investors. These properties offer relatively low price-points and investment grade credit for the major tenants in the sector. Add to that the recession-proof nature of discount retailers, and you have a winning combination for private investors, which are still the most active buyers in the single-tenant retail investment market. It’s not surprising that more than 800 single-tenant net lease dollar stores traded in 2019 and another 1,040 are currently being marketed for sale. Because of these characteristics and where we fall in the current economic cycle, dollar stores are well positioned to remain a highly sought-after investment for years to come.

Dollar stores have experienced success in every economic climate. During the last recession, the market saw a significant uptick in discount store foot traffic, as customers tried to stretch their dollar. Consumers remained budget conscious as the economy recovered, and bargain shopping remains en vogue even in today’s healthy economy. As we prepare for a market correction in the coming years, we expect to see discount retailers gain even more popularity, and recent and planned growth indicates that dollar stores are preparing for the uptick. Dollar General has announced 1,000 new stores in 2020, while Dollar Tree continues to focus on renovating hundreds of Family Dollar stores and growing in strategic markets.

Sector Diversifies as it Grows

Tremendous growth in the last decade has seen the number of dollar stores nationwide surpass 30,000 locations. There’s a Dollar General, Dollar Tree, or Family Dollar in nearly every small town, and we’re seeing new concepts like DGX open to impressive fanfare in denser urban markets including Philadelphia, PA, Cleveland, Ohio, and Nashville, Tenn. Tenants are thoughtfully considering their store design for newly constructed locations and deliberately increasing the variety of grocery items and consumables they carry.

The desire to appeal to customers of all types in all locations has worked, and as shoppers continue to demand convenience, we should see strong new store growth in rural markets as well as dense urban cores. Regardless of the location, dollar stores will continue to be very important to their communities. The presence of a Family Dollar in a small Midwest town, for example, or a new corner DGX in downtown Philadelphia changes the shopping dynamic of these areas and introduces a level of convenience that local residents likely haven’t had before. A dollar store’s typical community has little competition, which provides a captive audience and a very profitable store for the retailer—and for the investor who chooses to buy it.

How About Cap Rates?

As demand from real estate investors increased following the Great Recession, cap rates for dollar stores moved down in tandem. In just the last few years though, we have seen rate movement stagnate but remain low. Currently, the average cap rate for dollar stores with 10 or more years of lease term remaining, that have been on the market 90 days or less is 6.16 percent. Logically, many of these current offerings are newly built stores, as they offer the majority of longer lease terms. Furthermore, approximately 64 percent of Dollar General properties that traded in 2019 had been constructed in the last three years and, not surprisingly, these transacted at lower-than-average cap rates. Considering the expected volume of newly built dollar stores in 2020, investors shouldn’t expect to see average cap rates increase noticeably this year. And despite concerns that Amazon or other retailers may expand into this space and create more competition, net lease investors should remain well-positioned to capitalize on a deep product pool at attractive prices as we move closer to a shifting economic environment.