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Cap Rates Compress for Single-Tenant, Net Lease Dollar Stores, Says The Boulder Group

Capitalization rates within the single-tenant, net lease dollar store sector — which includes Dollar General, Dollar Tree and Family Dollar — compressed 50 basis points nationally from the second quarter of 2014 to the second quarter of 2015, according to the “Net Lease Dollar Store Report” produced by The Boulder Group.

Median asking cap rates at Dollar General stores nationally compressed 25 basis points, falling from 6.75 percent to 6.5 percent, during the 12-month period; Dollar Tree saw median asking cap rates decrease 10 basis points, from 7 percent to 6.9 percent; and median asking cap rates at Family Dollar stores fell 100 basis points, from 7.5 percent to 6.5 percent.

The significant decrease in cap rates for Family Dollar can be attributed to its recent lease structure change, according to The Boulder Group. Previously, leases for newly constructed Family Dollar stores were structured as a double net lease for a period of 10 years and did not contain rental escalations in the primary term. The new standard lease for newly constructed Family Dollar properties is a triple net lease for a period of 15 years and contains rental escalations every three years, or in the eleventh lease year of the primary term of the lease.

Western states currently boast the lowest median asking cap rates for the sector, with Dollar General at 6 percent, Family Dollar at 6 percent and Dollar Tree at 6.02 percent.

Dollar General and Family Dollar continue to account for the majority of the supply in the sector, with Dollar Tree stores only comprising 8 percent of the total supply in the second quarter. That’s because Dollar Tree stores are more commonly located within retail strip centers.

Expansion plans for Dollar General, Family Dollar and Dollar Tree have created a market with a consistent and steady supply of newly constructed assets, according to The Boulder Group.

In July, the merger of Dollar Tree and Family Dollar officially closed. As part of the merger, 330 Family Dollar stores will be sold to private equity firm Sycamore Partners. Family Dollar is now a subsidiary of Dollar Tree, and is no longer an investment grade-rated company.

Dollar stores remain one of the only viable alternatives to quick service restaurants with long-term, triple net leases priced below $2 million. As such they will continue to garner demand from all investor classes, the net lease report predicts.

Based in Northbrook, Ill., The Boulder Group is a boutique investment real estate service firm specializing in single-tenant net lease properties.

— Katie Sloan

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