What is a Good Cap Rate for Dollar General?
Dollar General overview
Dollar General is one of the country’s major dollar store chains, providing great savings on a broad range of merchandise.
Dollar General is intriguing from a net leasing standpoint because of its lower price points, a good sales record, and corporate development plan in a developing market area. The new Dollar General store concept is roughly 9,100 square feet and sits on 1.00 acres of land, with a minimum of 30 parking spots.
Dollar General net lease buildings provide strong exposure and full ingress/egress along high-traffic retail routes. A broader pool of eligible buyers results from higher cap rates and lower price points.
All Dollar General net leases include a company guarantee, and new stores are normally NNN with 15-year starting terms. Newly constructed Dollar General facilities offer lease agreements that typically include a 10% increase every five (5) years and options, making it a sought-after passive investment opportunity for out-of-state investors. A large chunk of the new shops is subject to build-to-suit agreements. Older establishments are often NN, with the landlord liable for the roof and structure, and have higher cap rates. These older shops with NN leases may have shorter periods, often 10-year leases.
Dollar General is a publicly listed firm founded in Kentucky in 1939 by J.L. Turner. Dollar General sells a wide range of stuff, including necessities, seasonal items, household goods, and clothing.
The shops are often low-cost, no-frills structures with minimum maintenance capital, low operating expenses, and concentrated goods offered over a wide variety of categories. 70% of the shops are in towns with a population of 20,000 or fewer people.
General market overview
According to the Net Lease Dollar Store Research, cap rates in the single tenant net lease dollar store sector fell to a new record low in the second quarter of 2021 for Dollar General (5.75 percent) and Dollar Tree (6.50 percent) locations. Cap rates for all three main dollar store brands (Dollar General, Family Dollar, and Dollar Tree) fell to 6.11 percent during the second quarter. The dollar store sector saw an 87 basis point decrease in cap rates year over year.
Throughout the Covid-19 outbreak, investor demand in the dollar store sector reached new highs. Cap rates for Dollar General, Family Dollar, and Dollar Tree fell by 115, 30, and 53 basis points, respectively, as compared to the second quarter of 2020. Dollar General accounted for the vast bulk of the market’s dollar shop supply (82 percent). A restricted supply of new construction buildings with investment-grade tenants and long-term leases was the key contributor to a cap rate reduction. The dollar sector is mostly made up of properties worth less than $2.5 million. This price range comprises the bulk of 1031 exchange requirements, which adds to the sector’s demand.
Historically, the dollar store industry traded at a large discount to the overall net leasing market. However, the dollar store sector was only priced at a 9 basis point discount to the entire retail net leasing market in the second quarter of 2021. This value was 73 basis points in 2020, indicating greater investor appetite for the industry.
The new store construction pipeline will keep this asset class appealing to 1031 investors, particularly when Dollar Tree introduces a new shop style. Dollar Tree has announced the opening of a new combo shop in 2021 that blends the ideas and product offers of both Family Dollar and Dollar Tree locations into a single structure. Net lease investors will closely follow the performance of these places as the idea spreads throughout the nation.
Why should you choose Dollar General?
It would be incorrect to claim that Dollar General investments are recession-proof; nonetheless, records demonstrate growth and stability throughout times of recession. We see the company’s success amid one of the most difficult global events in recent history due to a number of variables, most notably DG’s inexpensive, important consumer goods.
Dollar General aims to execute 2,900 real estate projects in the fiscal year 2021, including 1,050 new shops, 1,750 remodels, and 100 store relocations. In addition, the firm intends to establish roughly 30 pOpshelf shops, a new retail concept geared at a different sort of customer, possibly offering NNN investment possibilities in the future.
Despite the 1,050 new shops that open each year (DG inaugurated its 17,000th location in 2020) and the current stores that become available for sale, there remains a limited inventory for NNN investors. This is due to the fact that DG NNN properties are reliable, low-maintenance assets.
Another reason Dollar General properties are difficult to find for investors is that they are often sold directly from the developer or seller to a buyer through real estate experts and brokers, such as our team at Net Lease World. If a DG business is freely listed and marketed, it might be sold in hours or days, with several competing bids.
The main advantages of Dollar General NNN Investments
Dollar General absolute NNN lease investments often sell for between $1 and $2 million, resulting in a low barrier to entry into the NNN market due to the simplicity of financing and lack of landlord responsibilities. They are an excellent alternative for beginning CRE investors. They are frequently sought after by individuals executing a 1031 exchange since the transactions are simple and can typically be completed within the 1031 exchange deadline.
We have numerous seasoned CRE investors who own multiple Dollar Generals in various states and in urban, suburban, and rural locations, which provides crucial site diversity for any estate portfolio.
The main benefits:
The majority are absolute NNN leases for risk-free ownership.
Typically sell for between $1 and $2 million.
The average 12-month cap rate is 5.00–6.50%.
Excellent corporate credit and an investment-grade rating.
New construction lease for 15 years.
During the option periods, rent is often increased by 10% every five years.
As they enhance their retail market share, more sites are being created, refurbished, and moved.
Strong, consistent revenue growth per location/companywide.
In whatever economic scenario, affordable, needs-based consumables and services provide strength.
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