Are discount retailers Teflon tenants?

Tesla, L.L. Bean and Neiman Marcus have all touched down on Long Island in recent years, and they’ve generated plenty of buzz.

But they’re not the only national retailers that are targeting the shopping-center-saturated suburbs. Mid-size discount stores — often with “dollar” in their name — are also sweeping across Nassau and Suffolk counties, packing into plazas near rival stores at a pace that seems to have quickened over the past 12 months, brokers told The Real Deal.

Often focused on serving lower-income areas where stretching a paycheck is vital, these stores — which include Family Dollar, Dollar Tree, Five Below and Ocean State Job Lot — are moving in where traditional retailers have withdrawn amid the retail meltdown.

“The [discount retail] sector is doing really well,” said Jayson Siano, the chief executive of Garden City-based Sabre Real Estate, a retail brokerage that recently worked with a handful of discount retailers on the Island. “I think that the impact that the Internet is having on traditional retail is creating a lot of white space for discount stores.”

And, because the stores often sell brand-name household items for low prices, they can weather the competition from deep-discounters such as Amazon, Siano added.

While there’s no definitive count of the number of discount stores in Nassau and Suffolk counties, anecdotally speaking, numbers appear to be spiking. For instance, Five Below, a teen-focused bargain store based in Philadelphia, has opened four locations on Long Island in the past couple of years, and a fifth, in Commack, opened in February.

Big Lots, in the midst of its own multi-year expansion on Long Island, has seven locations here, including stores in West Babylon, Centereach and Carle Place. And Ocean State Job Lot, which opened a store in North Babylon in 2013, added Centereach and East Northport locations in the past two years. The acquisition of the Northport branch, located in a 36,000-square-foot former Bob’s Store, was the ninth-largest retail transaction on Long Island last year, according to CoStar. Other Long Island locations are currently being considered, Job Lot’s executive director, David Sarlitto, said, noting that the challenging retail market of the past few years has depressed some building prices, allowing companies like the Rhode Island-based discount store to claw their way in.   

The proliferation of bargain stores on Long Island seems to track with national figures. Discount retailers enjoyed a healthy 2.1 percent annualized growth rate from 2012 to 2017, according to “Dollar and Variety Stores in the U.S.,” a report from IBISWorld, a business-research firm.

Shoppers with “low disposable income” flocked in the early days, but many of the stores began adding brand-name products in recent years, deepening the customer pool, the report said.

Dollar Tree, which focuses on items that are $1 or less, has about 50 stores in Nassau and Suffolk counties, most concentrated in middle-class neighborhoods in the center of Long Island and along the South Shore, according to the company’s website.

The company also owns about 25 Family Dollars, which sells slightly pricier items in the same area.

The incursion of so many price-slashing stores is set against the backdrop of the weakened retail market, though Long Island has fared better than many other areas. Suffolk County’s vacancy rate climbed to 4.8 percent in the fourth quarter of 2017, up from 3.7 in the fourth quarter of 2016, according to CoStar. The average asking rent in the county was $24.21 per square foot annually, down from $25.23 in the year-ago quarter. The overall retail vacancy rate in Nassau County ticked up very slightly, to 4.3 percent in the fourth quarter of 2017 versus 4 percent in the year-ago quarter. Average asking rents in the county at the end of last year were about $29.50 per square foot annually, an increase from $27.41 in the fourth quarter of 2016, according to CoStar.

A special case

Discount stores — also known as “close-out retailers” — aren’t afraid to open several locations in close proximity to each other.

In fact, they often play off one another, said Sarlitto of Ocean State, whose company often owns the strip malls that contain its stores, which puts it in a good position to lease to other types of businesses, including those smaller discount stores.

“We sell stuff that they are just not going to have, like 50-pound bags of birdseed and kayaks,” Sarlitto said, adding that shoppers often hop from one discount store to another during the same outing.

In many cases, deep-discount stores require special configurations.

The Family Dollar that opened on Front Street in Hempstead in 2016, for example — the third Family Dollar there — insisted that 2,000 square feet of its 9,000-square-foot berth be back-of-the-house storage, said Ken Hillman, a project manager with Huntington-based AJM Associates, which developed the store.

Retailers that sell clothing or home electronics would require just a fraction of that amount of storage space, but a Costco-style business model that frequently hinges on buying items in bulk and then re-selling them for below-market prices, often demands huge on-site storage areas, brokers and landlords said.

Hillman declined to say what Family Dollar is paying, but in mid-January, the advertised rent for an empty storefront next door was $25 a square foot annually. That’s a top-end rate in the Hempstead area, where rents range from $18 to $25 a square foot, brokers said.

Bumps in the road

These discount chains, once averse to opening stores in New York City and its suburbs, now seem locked in a battle for local market share, analysts said.

A grocery store that is based in a strip mall in Nassau County where it is also the owner and landlord recently blocked a Dollar Tree from opening there by requiring a special waiver for its refrigeration unit, said Siano of Sabre, who declined to name the store.

“The grocery stores are becoming more aware” of competition from discount retailers, he said.

It can also be difficult to convince communities that discount stores are a good fit, said Hillman of AJM.

Hempstead village officials, who were involved in choosing the tenant for Front Street, were reluctant to rent to a discount store because they feared the store wouldn’t be able to sell enough cheap soda and laundry detergent to regularly make rent payments, Hillman said.

“They were worried it was too risky,” Hillman said. But they came around after Hillman compared Family Dollar’s price of Tide detergent against other more conventional retailers, he said, adding that they realized its cheap products were very competitive.

On the flip side, both publicly traded Dollar Tree and Dollar General are Fortune 500 companies, and for landlords, scoring a deep-pocketed national tenant is a coup, brokers said.

“These stores are in neighborhoods that don’t usually command billion-dollar corporations,” Hillman said.