Cap rates within the single tenant net lease dollar store sector compressed by 50 basis points from the second quarter of 2014 to the second quarter of 2015 to a 6.5% cap rate.
The dollar store sector, for the purpose of this report, is defined as free standing Dollar General, Dollar Tree and Family Dollar properties, as these tenants represent the largest presence within the sector.
While the entire sector experienced 50 basis points of cap rate compression, Dollar General and Dollar Tree experienced only slight compression of 25 and 10 basis points respectively. Cap rates for Family Dollar properties compressed significantly by 100 basis points during the same time period. This can be attributed to Family Dollar’s recent lease structure change. Formerly, new construction Family Dollar leases were 10 years, double net and did not contain rental escalations in the primary term. The new standard lease for new construction Family Dollar properties is 15 years, triple net and contains rental escalations every three years or in the eleventh lease year in the primary term of the lease.
Dollar General and Family Dollar continue to make up the majority of the supply in the single tenant dollar store sector. Dollar Tree stores only made up 8% of the total supply in the second quarter as Dollar Tree stores are more commonly located within strip centers. The cumulative expansion plans of all three tenants have created a market with a consistent and steady supply of new construction assets.
A significant event in the dollar store sector occurred in July 2015 when the Dollar Tree and Family Dollar merger officially closed. As part of the merger, 330 Family Dollar stores will be sold to Sycamore Partners, a private equity firm. While a large scale merger of this sort concerns some investors who own a Family Dollar near a Dollar Tree or vice versa, Dollar Tree has consistently stated that the stores do not create an overlap in business lines. Family Dollar is now a subsidiary of Dollar Tree and Family Dollar is no longer an investment grade rated company.
Dollar stores will continue to garnish demand from all investor classes as they remain one of the only viable alternatives to QSR restaurants with long term triple net leases priced below $2 million. However, demand will be saturated in new construction assets with long term leases as the tenant’s cumulative expansion plans create a steady supply of long term assets.
About the author: Randy Blankstein is President of net lease advisory firm The Boulder Group.