This just came out today and thought those interested in Retail investments would like to know.
This is what terrifies me about triple net deals. You know some of the Family Dollar stores are going to be closed as a result of this deal. Triple net is attractive at some point as a very passive, if modest return, investment. But if your tenant leaves you're left with an empty hulk that may be hard to re-lease.
I knew about Family Dollar and their woes since last year. I am have been advising my clients to stay away from them.
Family Dollar had gotten away from only one dollar items to sell and was mixing in high priced items which started reducing their profit margins. While Dollar General and Dollar Tree were having record per quarter profits Family Dollar was declining. DG and DT were focusing only on core one dollar items to drive sales.
In many ways in my opinion Dollar Stores on Triple Net aren't that appetizing to me to recommend to my clients. Used to 2 to 3 years back you could land at a 8 to 9 cap on them and the leases were vintage with rental increases in the primary term. Now the new leases are horrible asking a 6.5% cap which isn't bad but now no rent bumps in primary term until option periods after 15 years! That is nuts as many of these buildings are in junky areas or off the main corner. Unless you need to park 1031 money for awhile or cover gains on other properties it doesn't make sense to buy these. You would be better off getting a pharmacy built with solid construction sitting on 2 acres and a hard corner for the same cap rate with no rental increases and more tax write off.
I have some triple net buyers but many of my clients have moved to the retail strip sector. You can get a strip center and spread out breakeven occupancy risk to service the debt. We are still getting 8 to 9 cap or better on those with good quality tenant mix.
Funny, I was pitching family dollar NNN deals last week, and didn't see this coming!
To echo your concerns Jon, triple net investments can certainly fall apart quickly in the event the tenant vacates. However, real estate investment fundamentals still apply: location, location, location. So, if your NNN investment is located on a highly trafficked retail corridor, with low unemployment, growing demographics, and low crime, there are likely to be many potential replacement tenants willing to lease up the vacancy.
Most dollar store NNN deals are located in rural suburban areas where releasing could definitely be an issue. That's why I'm extremely cautious about pitching dollar store deals.
That said, the ones I was pitching to investors were located in major metro areas in California. Not in Nowhereville, USA ;)
If you notice Dollar Tree, and 99 cent stores are always close to Wal-Mart stories.
Dollar Tree is where I buy many of the items for my "Move-In Gifts" that I present in a bucket & bag to our residential tenants. I even buy the bucket and bag there! Glad they will be around for sometime. :-)
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