Why Are So Many Dollar Stores Being Sold Despite Strong Cap Rates?

Question

I have been analyzing commercial real estate opportunities involving stores like Dollar General, Dollar Tree, and Family Dollar. From a financial perspective, the numbers look attractive—many of these properties show a Cap Rate of 6%–8% or more, which is quite decent.

For example, if a Dollar Store property is listed at $1.2 million with an average Net Operating Income (NOI) of $90,000 per year, financing 50% with a 6.5% APR, loan would still result in positive cash flow from day one. Over time, the property appreciates, and with a five-year exit strategy, I would not only gain from rental yields but also from appreciation and loan equity buildup. Essentially, this investment appears to double the initial capital over five years.

However, I’ve been noticing an increasing number of these properties being listed for sale. Given that the financials appear solid and these are typically low-maintenance, stable investments, I’m curious—why are so many owners selling them? Is there an underlying risk or trend in the market that I might be overlooking?

Would appreciate insights from anyone with experience in this space!

Ryan Fox · Answer

@Naresh Yegireddi- This is above my pay grade but I was reading an article in the Wall Street Journal today about how the highest-earning 10% of Americans account for more than 50% of consumer spending. Those on the lower end of the income scale are more affected by inflation, and companies like dollar stores that cater to them have had a harder time growing sales. The stock of Dollar General is down 43% in the past year. Dollar Tree is down 48%. It's been a tough sector to be in.

Henry Clark · Answer

OP

1. You're talking about putting 50% down and then a 6.5% interest rate? You need to risk adjust your return based on the above comments. On your deal analysis, do stress tests. Assume at the end of the contract the tenant moves out. It sits for 1 year. Then the new rental rate is only half.

2. The deals you're looking at, how much longer on the contract and how old is the building? Are these standalone facilities in small towns, or in larger towns. This addresses the question of to what degree is it rentable after they leave.

3. There is very little use for an old store of these types in the smaller communities once they leave.

4. Google cost comparisons between those stores and Walmart. They are not truly as inexpensive as their names (Dollar) implies compared to Walmart.

5. "over time the property appreciates"? I would say no. Commercial is based on revenue stream. Even though the cost to build might have gone up (appreciation); the value will go do down if you don't keep a comparable lease in play.

Joel Owens · Answer

Been in commercial real estate 21 plus years and a specialist in NNN.

Investors getting started look at dollar stores as they are often only investment grade tenants in those tiny price points. 1 million dollar NNN like 100k house. Nothing much good in that range and when there is it goes for cash fast.

Most dollar stores sheet metal sides and back in junk areas. You are collecting a cash flow stream from an investment grade tenant but the property itself for land and building is almost worthless when it goes dark if they do not renew the option periods.

If the DG is NN lease the tenant will limp along repairs and then go with new developer for new building rather than exercising option and having to pay all that capex coming due. The sheet metal building will not be appealing to 90% of tenants that would want to go on the site if any did at all. Often in those small towns if DG vacates no national brands want the site just jo-bob small business owner who wants to pay 50 to 70% less rent than DG did.

The better DG's are buildings in strong suburban markets with upgraded construction or they moved into a vacated pharmacy store on a hard corner. Those are more 2 million and up in price.

These days if someone contacts me to work with them buying NNN I do not touch anything usually under 2.5 million in price. The location just isn't good in the smaller ranges. I believe in the quality of the dirt for location first, then tenant, then lease terms, etc.

Michael K Gallagher · Answer

@Naresh Yegireddi you also need to look into the locations of the building and general ability to re-tenant when then eventually leave or go dark. They are generally large retail boxes that in my experience need to get demised for another user to take over, unless you find some kind of "local grocery" to backfill. They can also be fairly remote and off the main "retail corridor" not always but its common.

Ultimately you need to understand the underlying economics, psychographics and demographics of the market you are purchasing in to know if and how you can re-tenant the property.

I'm a bigger fan of dollar generals or family dollars that are in multi tenant shopping centers. They tend to be set up to bring in a new anchor and re-stabalize after dollar general or the like leaves. the additional tenants also help obviously in the vacancy costs.

Bo Smith · Answer

The cap rates look good on paper but dig into the lease terms - a lot of these have short remaining terms or corporate guarantees that don't transfer. Also check the local market, sometimes dollar stores are the canary in the coal mine for neighborhood decline. What's the average lease term left on the ones you're seeing?

Robert C. · Answer

What Joel said.You have to look at replacement cost. Dollar General is famous for gain on sale of assets, using a lease to sell the property for well above what it cost, especially in rural areas with excess land available. When the lease expires, they'll repeat the process for another gain on sale, leaving the investor with an empty property.

Heather Sto · Answer

Likely because Dollar Trees are a horror show to deal with, the absolute worst of all tenants.

Evan Polaski · Answer

@Naresh Yegireddi

Generally, I like the NNN space for stable, long-term cash flow. But like all things real estate, one Dollar General may be worth it all day long, while another may not even be worth being given for free.

Given we are talking about the dollar store concept, any macro economic issues will apply universally.

If you are talking about Dollar General, specifically, and all are corporate guaranteed, tenant quality is equal across all possible properties.

So then you get into market analysis, store sales, lease terms, structure condition of property, specific location (mid-block with no left turn vs hard corner at signalized light), traffic patterns, re-tenanting ability and demand, current rent to market rent delta, etc.

All deals are unique, but I would not go in with an assumption that all Dollar General's appreciate. Not all have rent growth built into their lease, and some may be above market rents. So you could be buying an 8% cap on in-place numbers, and in 5 yrs, you have an empty building that will cost $1mm to redevelop just to get half the rent from local, non-credit tenants.

Why Are So Many Dollar Stores Being Sold Despite Strong Cap Rates?

Why Are So Many Dollar Stores Being Sold Despite Strong Cap Rates?

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Why Are So Many Dollar Stores Being Sold Despite Strong Cap Rates?