Commercial Real Estate Investors Are Flocking to Discount Retailers

When it comes to net lease real estate investor demand, the dollar is strong.

Amongst the subset of commercial real estate investment groups which focus primarily on retail properties that operate under net leases, dollar discount stores continue to be highly sought after. The National Real Estate Investor (NREI) recently found that the cap rates on these types of assets has remained unchanged since this time last year. Add to that the fact that these properties were, on average, 87 basis points lower than cap rates on other types of retail net lease assets and it’s not hard to understand the continued popularity of these nationwide discount retailers.

Nationally, nearly 30,000 dollar discount stores exist. That’s more than the number of McDonald’s and Wal-Mart locations combined. And that number is rising quickly, with it jumping from just 20,000 stores in 2011.

A broader look at the retail landscape reveals why these stores are surging in popularity while some other longtime retailers struggle to retain their foothold in the competitive retail market. With large national retail chains such as Sears shuttering their brick and mortar stores, how are dollar discount stores the exception to the sluggish retail rule?

The first and most obvious answer is price point. Most of these discount retailers focus on a customer base which averages a household income of $35,000 or less per year. But lower prices aren’t the only reason why these stores are succeeding.

Many of the retail locations for dollar discount stores are located in towns with a population of 20,000 and fewer. This means that residents in rural locations across the United States, who previously have been many miles from the closest grocery or big box retailer, make these discount stores their primary shopping destination.

Paradigm Tax Group currently handles the property tax needs of a major national discount retailer who opened hundreds of new retail locations in 2018 with a similarly robust expansion plan for 2019.

According to Paradigm managing consultant Ryley Brown, “Our client began a process in December 2018 to rebrand and relocate their assets to ‘strong-hold’ locations. The plan of closing stores in metropolitan cities, while rebranding and redeveloping or adding new stores in smaller areas with less traditional retail competitors has already paid dividends for them in 2019 Q2.”

To meet the needs of these more rural customers, most dollar retailers are expanding their refrigerated grocery offerings. In an effort to become a one stop shop for that customer base, these discount stores are looking to fill the role that larger grocers, toy stores and hardware stores offer to consumers in more populated metropolitan areas.

“Our discount retail clients are in a peculiar position of strength due to their high quantity of inexpensive commodities in places that they find themselves as the only competitor in their local market,” says Brown.

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