Identifying Recession Proof Commercial Real Estate Investment Opportunities

September 11th, 2019 | Bernard Birnbaum

 When identifying potential real estate transaction investors have their own criteria to meet their standards but, in this case, we are talking about investments in a down economy. Currently the United States is experiencing an extremely strong economy that has been developing over the last decade. There will always be downticks in any economy which typically occur around seven years into an economy cycle and we are past due for this to occur. The thought of a major downtick or recession changes the way in which one identifies a potential real estate investment deal. Many of the normal factors change and we must look at businesses and industries that thrive in our current economy and survive during a recession. An industry that meets these requirements are dollar or discount stores. More specifically we have identified Dollar General (DG) as a tenant whom can weather the storm and be an effective investment opportunity.   

Rapid Expansion of the Brand

Chart showing the number of stores of Dollar General in the United States from 2007 to 2018In 2008 we experienced one of the worst recessions for this generation and many businesses suffered. An industry that ended up flourishing during this time were dollar and discount stores. The public started to change their buying habits being forced to tighten their belt while still receiving products they desired. This is where Dollar General saw an opportunity for expansion within the US marketplace. At the end of 2008 DG had approximately 8,300 stores open across 35 states [1]. Throughout the following decade they would continue to expand their locations by almost doubling their total operating units. As of May 2019, DG has 15,597 stores in 44 states with plans to open 975 stores this year. [2] This makes Dollar General one of the largest retails in the United States with more opened locations than Starbucks. [3] Expanding this quickly has caused some controversy as many of these stores were developed in urban settings and often within a few miles of each other. This has caused backlash from local communities as dollar stores stifle competition and lack many of the healthy options people desire. In response cities have started to push back and limit the number of dollar stores within a geographic region. [4] Dollar General has started to look at options to add fresh produce to their locations and other healthier options for consumers.

Identifying Potential Acquisitions

If you are on any of the national brokers eblasts then you been overwhelmed with Dollar Generals for sale and a search on Co-Star will reveal a map of the United States filled with listings. The rapid expansion over the last decade has created an abundance of Dollar General sites currently for sale. This large amount of inventory is hitting the market as developers recaptured their initial costs and are looking to exit. Many of these listings show ten-year terms remaining with multiple renewal options, their standard rental increase is 10% per renewal period. As we look for assets to round out a portfolio these listings become very attractive. The large amount of inventory can be overwhelming and in order to limit potential locations they must meet several criteria.

Dollar General Store Front

 First identify the geographic area for potential purchases. When selecting assets, it’s a good idea to keep them close to your current geographic region to leverage existing infrastructure and relationships with vendors. Most Dollar General leases are double or triple net, and this allow for less management. The structure of the leases allows for a larger search area. Once a location is identified it’s time to take a more in depth look and this includes local population, proximity to other DG, and largest employer in the area. This helps us determine the viability of a location and any potential long-term risks. An important aspect is the buildings age. This help with developing a budget for maintenance and future replacements. When selecting locations out of your typical demographic it’s important to know which future vendors you will need. Every investor will have their own criteria, but these are some of the initial items we look at to dwindle down the list of investments.

Understanding their Value

A list of potential investment properties has been identified that meet the initial criteria. The next and most important step is to drive into the numbers of each location. A large majority of the Dollar General listings have ten years remaining on their lease and NOIs range from $50,000 to $100,000. This range for rental rates is dictated by the location and competitors. We identified a location in North Dakota on the higher end of this range. Why does a DG in North Dakota have such higher rent compared to the rest of the nation? This town has a population of approximately one thousand people with the nearest Dollar store thirteen miles away. There had to be another reason for the above average NOI, and we started to research the area. Our research showed that this area has a large hunting and camping community. This Dollar General is one of the only places for tourists to shop at before their excursions and this justifies the rental amount. It is important to complete your research to better understand an investment and the reasoning behind rental rates, your research should not be limited to the property. Without knowing about the tourist population this location would have raised a red flag and could potentially close because of above market rents.

 Historically the cap rates associated with Dollar General have stayed consistent between 6-7% but recently there has been an uptick in their rates. This would raise concern over the credit worthiness of a tenant, but I believe this has nothing to do with credit but supply. The rapid expansion and developers looking to recoup their capital has placed hundreds of units onto the market for sale. This has become another reason to target Dollar Generals for purchase. An abundance of supply is forcing current sellers to raise their cap rates to remain competitive within the marketplace. There are sellers with multiple units in their portfolio which can lend to a higher cap rate for a package deal. In future times of uncertainty, Dollar General properties become a stable asset for any real estate investment. Their low management makes for an ideal acquisition for an experienced investor or someone looking to diversify their assets. 

Bernard Birnbaum is a third-generation commercial real estate developer and property manager located in Rochester New York. He runs the daily operations of Birnbaum Companies and its subsidiaries Birnbaum Real Estate and The Warrior Factory. Their real estate portfolio includes assets across New York and Canada. Bernard is also involved with several start-ups in a verity of sectors. Follow him on Instagram @birnbaumcompanies and LinkedIn

References

[1] "Dollar General," 10 February 2009. [Online]. Available: https://newscenter.dollargeneral.com/news/dollar-general-fourth-quarter-2008-same-store-sales-increase-94-plans-to-open-450-new-stores-in-2009.htm.

[2] "CBS News," 5 June 2019. [Online]. Available: https://www.cbsnews.com/news/dollar-general-is-no-1-retailer-for-opening-stores-this-year/.

[3] "Statista," 2019. [Online]. Available: https://www.statista.com/statistics/218360/number-of-starbucks-stores-in-the-us/.

[4] "CNN," 19 July 2019. [Online]. Available: https://www.cnn.com/2019/07/19/business/dollar-general-opposition/index.html.

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