Michelle Napoli is the editor of Real Estate Media’s Net Lease Forum. For the full story, please click on Net Lease Forum.

GOODLETTSVILLE, TN-Dollar stores represent one of the fastest growing segments of the retail industry—and the trend isn’t expected to slow down any time soon. There were about 30,000 dollar stores and other so-called “small-format value retailers” in 2004, and another 6,000 net new stores are expected to open between now and 2009, according to the latest data from Retail Forward Inc., a market research firm in Columbus, OH. The firm’s next annual report on the dollar store industry is expected to be published in a few weeks.

With most of these properties selling for between $500,000 and $1 million, they’re well within the reach of many investors. “They seem to be flying off the shelves,” says Jay Bastian, SVP of Orlando-based Commercial Net Lease Realty Inc. and head of its 1031 exchange division. “It gives the broadest sector of investors out there a chance to buy a net-lease investment.” With the exception of tenant-in-common investments, he notes, “there aren’t many alternatives at that price point.”

To be sure, it’ not all rosy. On the down side, says Bastian, dollar-store transaction costs can be expensive relative to the amount being invested. He says he’ tried to put together take-out deals with developers in the past, but that the transaction costs ate away the profits. Also, Bastian notes that, since dollar-store locations are often in very small markets, an investor needs to think seriously about re-leasing prospects should a dollar store tenant not renew.

“If a dollar store can’t make it, chances are another dollar store isn’ going to want it,”says Bastian. Still, the sector is quickly mushrooming. The biggest operator of these budget-conscious shops is Goodlettsville, TN-based Dollar General Corp., which was recently boosted to a BBB- rating by Standard & Poor¹s Ratings Service and upgraded to Ba1 by Moody’s Investors Service. This chain alone accounts for 7,551 stores in 30 states in the eastern half of the country—that’s more than triple the company¹s 2,059 stores in 1995.

And the company plans to keep growing, particularly by moving westward. It expects to open 730 new stores by the end of 2005, and chairman & CEO David A. Perdue said during a presentation during the recent Credit Suisse First Boston Retail Apparel and Restaurant Conference that the company is “rapidly growing a more national presence.” It also continues to test its Dollar General Market concept, which offers full grocery items, with 24 locations currently operating in five states.

The second largest dollar-store chain in the category is Family Dollar Stores Inc., based in Matthews, NC, which has more than 5,600 stores in 44 states. Its plans were to add more than 500 new stores during the fiscal year that will end in late August. And in third place is Chesapeake, VA-based Dollar Tree Stores Inc., which operates more than 2,400 stores under a number of brands, including Dollar Tree and Dollar Bill$. Neither Family Dollar nor Dollar Tree Stores are rated by the three main ratings agencies.

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