Dollar General Properties: High Demand Compresses Cap Rates

Jan 28, 2021

Since the COVID pandemic began, Dollar General triple-net (NNN) lease property investments are in even higher demand than usual with limited supply, which has compressed cap rates. Even with lower cap rates than in Q1 2020 (-10–15 basis points), these properties still offer higher cap rates than most commercial real estate (CRE) and additional investor benefits that other CRE can’t match. These include but are not limited to:

  • A history of stable growth in all economies, even in a recession.
  • A low barrier to entry.
  • Corporate-guaranteed, absolute net leases.
  • Being extremely financeable.

Let’s take a deeper look into why, as a commercial real estate investor, you should consider investing in Dollar General properties and if you do, you need to be ready to act fast.

Women hands hold a money bags

Dollar General Properties Offer Stable Growth in Any Economy

It would not be right to say with one hundred percent certainty that Dollar General investments are recession-proof, however, records show growth and consistency in times of recession. Due to many factors, mainly DG’s affordable, essential consumer offerings, we are seeing the company’s strength during one of the most challenging worldwide events in modern history.

“Third quarter [2020] net sales increased 17.3% to $8.2 billion. Gross profit as a percentage of sales was 31.3%, an increase of 178 basis points, which represents our sixth consecutive quarter of year-over-year gross margin rate expansion,” said Todd Vasos, CEO. (from DG Earnings Call, Oct. 31, 2020).

During fiscal year 2021, Dollar General reports plans to complete a total of 2,900 real estate projects, including 1,050 new stores, 1,750 remodels, and 100 store relocations. The company also plans to open approximately 30 pOpshelf stores, a new store concept tailored to a different type of consumer, potentially adding NNN investment opportunities going forward.

Notwithstanding the 1,050 new stores opening annually (in 2020, DG opened its 17,000th store) plus the existing stores that become available for sale, there’s a limited inventory for NNN investors. This is attributed to the fact that DG NNN properties are such solid, maintenance-free investments.

Another reason Dollar General properties are elusive to investors is that quite often they don’t make it on the open market – they’re sold directly from the developer or seller to a buyer through real estate advisors and brokers, like our team at Westwood Net Lease Advisors. If a DG store is listed and advertised openly, it can be sold in a matter of hours or days, with multiple competing offers.

The market for dollar stores is getting stronger – they are becoming the sole shopping choice for many communities, even in locations where there is a Walmart and a large grocery chain.

Person taking money out of wallet in store

Absolute NNN Lease & Low Barrier to Entry

Dollar General absolute NNN lease investments typically sell between $1 and $2 million, which, along with the ease of financing and no landlord responsibility, makes for a low barrier to entry into the NNN market. They are a great choice for new CRE investors and highly sought after by those performing a 1031 exchange, as the transactions are straightforward and can usually be closed in the 1031 exchange timeline with ease.

As for experienced CRE investors, we have many who own several Dollar Generals in different states and in urban, suburban, and rural communities, which creates important location diversification that benefits any estate portfolio.

The Benefits of Dollar General NNN Investments

  1. Most are absolute NNN leases for responsibility-free ownership.
  2. Typically sell between $1–2 million.
  3. Average 12-month cap rate is 5.00–6.50%.
  4. Solid corporate credit and investment-grade ranking.
  5. 15-year lease on new construction.
  6. Typically, 10% rent increases every 5 years in the option periods..
  7. More locations being built, updated, and relocated as they increase retail market share.
  8. Strong, reliable sales and growth per location/companywide.
  9. Affordable, needs-based consumables and services offer strength in any economic climate.

Dollar General Properties: Investment-Grade & Financeable?

NNN investment financing options and down-payment requirements are calculated on a case-by-case basis depending on your portfolio, the creditworthiness of the tenant, the length of lease, and the property location. Are Dollar General properties in the running for financing and is it wise to take on debt to purchase one?

Lending: In the current COVID marketplace, financial institutions are looking for investment-grade corporate tenants who are categorized as “essential” and offer long-term, guaranteed leases. Dollar General exemplifies these requirements, making financing more likely.

Interest rates: As of right now, we are still experiencing historically low interest rates, which can increase positive leverage, provide a higher cash-on-cash (CoC) return, and a better overall rate of return (IRR). With low interest rates and lenders willing to give commercial mortgages for Dollar General investments, even in an uncertain economic and political climate, you can capitalize on the positive spreads between interest rates and cap rates and continue to receive a long-term, stable monthly income.

Cap rates: Despite lower cap rates than normal due to limited supply and high demand, Dollar General properties generally provide higher cap rates than the overall net lease market. In fact, in 2020, when other net-lease properties experienced a decline in overall transactions, dollar stores increased around three percent. Cap rates currently sit between 5.00% and 6.50%.

75% of the US population is now within five minutes of a Dollar General store. − GlobalData Retail

Supply & Demand chalkboard

To Wrap it Up: Dollar General NNNs – High Demand + Limited Supply + Historically Low Interest Rates = Cap Rates Compression

If you want to invest in a Dollar General NNN property but you’re not sure how to go about getting one or if you’re fearful of the market’s instability, Westwood Net Lease Advisors is here for you. Although there is high demand and a limited supply, we are confident you can invest safely and wisely in a NNN lease Dollar General property – if you are willing to act fast.

To locate one for sale and make an offer, it’s in your best interest to work with a Westwood advisor. Daily, we reach out to our nationwide network of developers, sellers, and brokers and use our proprietary database to find up-and-coming properties for sale, which offers advantages to our clients, often including first-right-of-refusal and low or no competition.

The Westwood Net Lease Advisors team is here to offer perspective and advice, represent you from pre-property search through closing, and if you’re planning a 1031 exchange, we’ll help get the right property for your goals and close your transaction on time – all at no charge. Contact us today for a no-obligation consultation. 314-997-5227


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