Cap Rates on the Rise at Dollar Stores

What might seem to an outsider to be odd times in the dollar store industry is actually what an insider would expect, according to a new B+E report. Even as the Federal Reserve had kept the benchmark federal funds rate through the third quarter, the average cap rate for dollar stores grew from 6.34% to 6.51%.

The increase is well-aligned with market norms, as sellers recalibrate pricing to facilitate financing access and keep pace with Federal Reserve rate hikes,” they wrote. On-market listings have increased 13% from 477 to 538.

So far, the report is in keeping with broader observations and analyses of net lease. Across the spectrum, cap rates have been climbing over the last six consecutive quarters, The Boulder Group reported. And triple net lease inventories have been on the rise since at least May 2022, according to the calculations of Chris Lomuto at Northmarq.

“Dollar Stores have benefitted from a reduction in ocean freight costs and an increased customer base with household incomes over $125,000,” they wrote. The shift in customer base is interesting and suggests more general economic pressure on a broader spectrum of the country.

Generally, the cap range is 5.00% to 10.00%, with an average cap of 6.51%. Average price is $1,706,336 with a price range from $324,188 to $4,545,000. Average square footage is 10,420 square feet with average price per square foot of $166, NOI of $112,815, and average term of 10.2 years. Actual term range was 0.0 to 16.7 years.

“Although profit margin pressures will likely continue during economic uncertainty, B+E predicts Dollar General and Dollar Tree will likely ride out this era of inflation and continue to modestly expand in location count,” they wrote.

Dollar General scaled back growth it its August outlook after a CEO change, OSHA fines, and reduced guidance on sales from 5.0%-3.3% to 3.3%-1.3% and on profits from growth of flat-to-8% down to an earnings decline of 22%-to-34%.

Its average least term is 15 years with a 10% escalation structure every five years and a net-net-net lease structure.

For Dollar Tree, it’s 10-to-12-year terms with a 5%-to-10% average escalation every five years and a net-net lease structure. As you might expect, Family Dollar is quite similar to Dollar Tree, which owns the chain.