By Karla Zens
As the real estate market warms up in the Southeast and across the U.S., dollar stores retain their red-hot appeal with real estate investors. Dollar stores — such as Dollar General and Family Dollar — gained shoppers during the economic downturn and have maintained popularity, even attracting new demographics. They’ve done so by improving their merchandise to include more name brands, adding more food and drug options, upgrading and renovating existing stores and, of course, building new stores at a record pace.
The smaller footprint of dollar stores makes them more manageable and faster to navigate than their big-box brethren. As sales and target audiences have grown, dollar stores have entered more desirable Southeast markets with better demographics.
Based on this success, as well as the relative lack of inventory in the market, cap rates for dollar stores have continued to fall in 2012. In the case of Dollar General, factors compressing cap rates include recent credit hikes, a low price per square foot, small price points, the transition to a triple-net, 15-year corporate lease, and the availability of new financing. Investors are also gaining confidence that they could replicate the rent if a dollar store were to leave at the end of a lease term.
According to CoStar, agents from investment brokerage firm Capital Pacific have arranged the sale of more than one-third of the 59 Dollar General properties sold in Florida since Jan. 1, 2010.
Zandy Smith, a partner in the San Francisco office of Capital Pacific, shared his insights on the appeal of Florida dollar stores and similar net lease assets to investors from across the U.S. “The California investors that Capital Pacific works with will pay a premium because cap rates in the Southeast are more attractive than cap rates that can be realized within California,” Smith says.
A Dollar General in Middleburg, Florida, which sold for $1.17 million at the end of April.
There are also some subtle factors that make Florida a magnet for investment capital. “We’ve worked with numerous investors from across the U.S. who invest in the Jacksonville and Orlando markets because they have family or a second home in Florida,” says Smith. He adds that investors also appreciate proximity to major airports, which allows easy access to properties for annual site visits.
Tennessee is another attractive state for West Coast investment capital. Capital Pacific has brokered the sale of 11 Family Dollar stores in the Memphis MSA in the past year alone, which amounts to over two-thirds of the Family Dollar stores that sold in Tennessee, according to data from CoStar.
John Andreini, also of Capital Pacific’s San Francisco office observes that besides access to aggressive West Coast capital, investors flock to Tennessee and Florida because of the tax-free nature of the states and also because they represent the perfect demographics for dollar stores. “Dollar General’s credit rating increase will contribute to cap rate compression, as will Family Dollar’s strategic shift toward fee-based development of more of their new stores, since it will reduce the supply of dollar stores on the market,” Andereini says.
With California “asking” cap rates for Family Dollar and Dollar General stores lower than elsewhere, these investors are naturally inclined to go out of state seeking a relatively higher yield.
— Karla Zens is the sustainability and marketing director for Capital Pacific’s San Francisco office. Capital Pacific is a boutique investment brokerage firm specializing in the sale of retail properties across the U.S. www.capitalpacific.com