Dollar Store Cap Rates Fall in Q2
Eighty-two percent of the dollar store supply on the market was with Dollar Generals.
In the second quarter, national asking cap rates in the single-tenant dollar store sector fell to 6.11%, according to The Boulder Group’s 2021 Net Lease Market Report.
The Boulder Group attributed the cap rate compression to a limited supply of new construction properties with investment-grade tenants and long-term leases.
“It’s a confluence of interest rates and it’s a confluence of where cap rates are today,” says Randy Blankstein, president of The Boulder Group. “Dollar stores have benefited from a flight to safety during COVID. Because of COVID, new development got pushed aside for most tenants, and the dollar stores are aggressively growing as much as everybody.”
With properties below $2.5 million, the dollar sector price point contains the majority of 1031 exchange requirements, adding demand to the sector.
Historically, the dollar store sector traded at a significant discount to the entire net lease market. However, in the second quarter of 2021, the dollar store sector was priced only at a nine-basis point discount to the overall retail net lease market. In 2020, dollar stores traded at a 73-basis point discount to the overall retail net lease market.
“They [investors] can get a 15-year triple-net investment grade tenant that does well during downturns and that they have no issues with,” Blankstein says. “That should be worth the same as a 20-unit Taco Bell.”
Blankstein says many investors came over from quick-service restaurants, which have had little new construction and aren’t paying the cap rates they should be.
“I think more people understand the business model and understand that they’re e-commerce resistant as well,” Blankstein says. “They hit all the boxes.”
Dollar General cap rates compressed 115 basis points to 5.75%. Dollar Tree fell 53 basis points to 6.50%, while Family Dollar dropped 30 basis points to 6.85%. Eighty-two percent of the dollar store supply on the market was with Dollar Generals.
There is a lot of change occurring among dollar stores. While Dollar Tree is rolling out a new store format, Dollar Tree recently introduced a new combination store in 2021. This store combines the concepts and product offerings of Family Dollar and Dollar Tree stores into one building.
“The big compression is behind us, but it’s not over,” Blankstein says. “But they’re easily as good as the average net lease property. So they should be trading like the average net lease property.”