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Dollar Stores Add Up To Big Bucks for Net Leased Investors

Often Standalone, Triple Net Leased Retail Outlets Increasingly Popular Among Other Favored Net Leased Properties
December 19, 2012
Dollar stores continue to expand aggressively throughout the U.S. And the popular stores are single-handedly changing the net lease investment market, which has traditionally been dominated by drug store, fast food and automotive retail concepts, according to the latest net leased retail research.

“They have always proven to be popular with investors because of the minimal property management involved, (triple net leases typically pass all expenses on to tenants,) and the usually longer term leases favored by drug store and fast food users,” Garrick Brown, director of Research for Cassidy Turley, reported this past week.

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"With the dollar store sector entering its third year of explosive growth and most chains considering everything from inline space at shopping centers, to more and more freestanding locations, investors who have struggled to find available drug store or fast food product are increasingly looking to standalone dollar stores for their net leased deals despite the fact that most of the active chains are still inking deals for 10 years or less," Brown added.

"We anticipate that this sector alone will account for a minimum of 15 million square feet of occupancy growth (this number could easily cross the 20 million square foot mark) across all retail building types in the coming year," said Brown, who observed that Dollar General is expected to open as many as 625 stores in 2013, while expanding its food and grocery offerings in existing locations. Family Dollar is also expected to open at least 500 new stores, while Dollar Tree has plans for at least 300 new units in 2013.

Not surprisingly given the popularity of triple net retail properties, the dollar store sector is also accounting for more investor interest as well.

The median capitalization rate for single tenant net leased Dollar General and Family Dollar properties compressed by 16 basis points from the third quarter of 2011 to the third quarter of 2012, according to the Boulder Group, boutique investment real estate service firm specializing in single tenant net lease properties

This cap rate compression is derived by the combination of historically low interest rates, a lack of investment grade assets available at a low absolute dollar amount and a surplus of 1031 exchange investors with low equity requirements, Boulder reported.

Transaction volume remains heavily concentrated in recently constructed dollar store properties; however stores located in above average markets with strong demographics remain in high demand.

Dollar Store Sales by the Numbers

Examining 117 Dollar General and 107 Family Dollar store sales since October of last year, CoStar data shows per square foot prices are increasing. In the fourth quarter of 2011, Dollar General stores were selling for an average of $83/square foot. In the third quarter of this year, prices were averaging $116/square foot - a 40% increase.

Looking at Family Dollar store sales, they too are showing significant price increases. In the last quarter of 2011, Family Dollar stores were selling at an average of $111/square foot. In the third quarter of this year, that price was coming in at $123/square foot - also an 11% increase.

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