CHICAGO—The economic recession brought big changes to American retail. It hit middle-market stores hard, but many outlets serving cost-cutting consumers thrived, and investors continue to buy up the growing number of dollar stores, 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 the third quarter of last year.

“They trade at a premium compared to other properties because the lease terms are ten years or more, you have investment grade tenants, and the price points work well for small investors,” Randy Blankstein, president of Boulder, tells GlobeSt.com. Typically, investors can buy the top dollar stores for between $1.1 million and $1.5 million.

Properties tenanted by Dollar General, Dollar Tree and Family Dollar experienced cap rate compression of 51, 75 and 50 bps respectively, Boulder found. Rates for Dollar Trees fell to 7.0% and Family Dollars hit 7.5%. “Cap rates for Dollar General represented the lowest overall cap rates in the sector (6.75%) due to the abundance of newly constructed locations. Additionally, typical leases for Dollar General are fifteen year and triple net as opposed to the typical ten year double net leases for Family Dollar and seven or ten year double net leases for Dollar Tree.”

New construction dollar stores remain the most popular and trade at a 50 bps premium over the sector as a whole, Boulder also found. And the economic recovery has not curtailed the public's appetite for these low-cost shopping options. In fact, in the third quarter, new construction made up 45% of the sector.

“This is the most new construction by number of stores than in any net lease sector out there today,” Blankstein says. “The dollar stores have been in a race to outpace one another.” He expects that developers will finish as many as 1,500 new stores this year.

All of this construction could be playing a role in the efforts by Dollar General and Dollar Tree to acquire Family Dollar, he adds. As reported in GlobeSt.com, on Tuesday Dollar General made an all-cash offer of $80 per share, or about $9.8 billion, for Family Dollar. The move came after a previous offer of $78.50 per share was rejected, and after the boards of both companies had earlier this summer approved a $9.2-billion cash-and-stock deal for Chesapeake, VA-based Dollar Tree to acquire Family Dollar.

Once one of the deals goes through, the dollar store business will have, like most other net lease sectors, reduced itself to two dominant players instead of three, and allow the remaining companies to better focus construction efforts, according to Blankstein. “There will then be a lot of towns that they won't need to put new buildings into.”

Although having two big players will bring much greater efficiency, and eventually strengthen the overall market, in the short-term it could slow up the level of trading “as people wait to see how this plays out.” Weaker locations that duplicate stronger ones, for example, may be closed.

However, once the dust settles, those stronger locations that survive will become even more attractive to investors and begin trading at a premium, Blankstein adds. “This will definitely sort things into winners and losers.”