Dollar Store Net Lease Cap Rates Fall

In the second quarter, national asking cap rates in the single-tenant dollar store sector decreased to 6.98 percent, falling to a three-year low, according to the 2020 Net Lease Dollar Store Report from The Boulder Group.

Even with that compression, which was a decline of 12-basis points year-over-year, the dollar store sector is priced at a 73-basis point discount to the overall net lease retail market, according to Randy Blankstein, President of The Boulder Group. 

While the net lease market experienced a 20-percent decline in transaction volume through the first two quarters of 2020, transactions in the single-tenant dollar store sector increased by approximately 3 percent.

The increased demand for this sector, which has been considered essential during the coronavirus pandemic, is the primary contributing factor for the decrease in cap rates, according to The Boulder Group. Right now, investors see single-tenant dollar stores as a safer bet than other their traditional competitor—quick-service restaurants (QSR).

“A lot of the competition at that price point has been historically against QSR, and QSR doesn’t have as many new locations being built-in,” Blankstein says. “QSR’s problem at the moment is people don’t want smaller franchisees. They all want either corporately owned stores or the large franchisees.”

With single-tenant dollar stores, investors also get new construction and an investment-grade corporate tenant and don’t have to deal with franchises. 

“They’re also well-suited for COVID-19 with grocery-related products and low-price points in a recession,” Blankstein says.

Another driver of interest in single-tenant dollar store sector is the length of the lease. The median remaining lease term for available properties during the second quarter increased by one year to approximately eleven years, according to The Boulder Group.

Cap rates for all three of the major dollar store retailers (Dollar General, Family Dollar and Dollar Tree) compressed during the second quarter, according to The Boulder Group. Dollar General, Family Dollar and Dollar Tree saw their cap rates fall by 15, 10 and 7 basis points respectively.

“People like dollar stores, especially during uncertainty,” Blankstein says. “Dollar stores outperformed during the 2008 to 2010 period during the downturn in the economy. People are all over the map as far as how long COVID lasts and what the impacts are. But investors feel comfortable that regardless of which way it goes, dollar stores have a defined niche and are proven to be recession-resistant for the most part.”

Blankstein says that 1031 investors with lower absolute dollar amount exchanges continue to flock to this sector. “We’re still doing deals for 1031 exchanges right now,” he says. “Dollar stores are still in demand, especially the ones that have some type of larger populations near them. Most people think of dollar stores, and they think about tertiary rural markets. But there are some in secondary markets and even in primary markets. If you get one in a secondary market versus a tertiary market, there’s a lot more demand for it from just a reuse residual real estate perspective.”