Are Walgreens Asking Cap Rates Lagging the Market?
What should the asking cap rate of a new Walgreens lease be? A survey of today’s offerings suggests in the 5-6% range. However, those rates do not line up with reality and act as if Walgreen’s credit was never downgraded. In-fact asking cap rates for Walgreens do not appear to have changed since the downgrade was first discussed in June and implemented in August. It’s as if sellers are trying to prop up the Walgreens brand by will power alone. The reality is closing rates have risen since downgrade but asking rates have not.
At the beginning of 2012, Walgreen’s was the clear premier asset in the Pharmacy sub-market and their closing rates reflected that – averaging 6.52% compared to 7.30% for CVS. That reality began to change in June – when the downgrade was first discussed. With CVS and Walgreens roughly equivalent in credit rating (CVS has a slight edge with a BBB+ compared to BBB for Walgreens) the rental bumps generally featured in CVS leases made CVS a more attractive option to many investors. The Walgreens brand was heavily supported by their high credit rating – is was probably their biggest selling point – to ignore the affects of their credit downgrade is to ignore reality.
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