CHICAGO—Cap rates for single tenant net lease properties havebeen trending down for quite some time, often hitting historic lows, but investors find few sectorsas appealing as drug stores. And according to the most recentreport from the Boulder Group, a commercial realestate services firm located in suburban Northbrook, IL, cap ratesfor top drug store brands have fallen since the third quarter oflast year.

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Walgreens, CVS andRite Aid single tenant properties experienced caprate compression of 15, 17 and 25 bps respectively,” according tothe new report. “Part of the compression can be attributed to thesignificant decline of 9% in the supply of drug store propertiescurrently being marketed.”

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The Walgreens rate now stands at 5.6%, with CVS at 5.9% and RiteAid at 7.75%.

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“Investors are attracted to these properties partly because theyare one of the few opportunities with tenants that sign leases of20 years or more,” Randy Blankstein, president ofBoulder, tells GlobeSt.com. “And most people believe thatpharmacies will always do well, especially since, unlike a lot ofother retail, pharmacies are resistant to internetcompetition.”

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Furthermore, investors in drug stores have access to a muchwider variety of financing, such as CTL financing,than they would with other single tenant properties, Blanksteinsays. Getting CMBS financing is also a strongpossibility, “which you usually can't get if the property is under$4 million.”

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“Investor demand in the drug store sector remains active asevidenced by the 85 bp premium to the entire net lease retailmarket,” the new report states. The cap rate for the retail netlease market as a whole sank from 7.02% in the third quarter to6.75%, but the drug store rate hit 5.9%. “With cap rates in the netlease retail sector at all-time lows, owners of drug store assetshave added properties to the market at aggressive prices in attemptto take advantage of higher valuations.”

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However, there was still a significant decline in the number ofdrug stores on the market. In the third quarter, for example,Walgreens had 156 properties on the market, but by this year thathad dropped to 131, a decline of 16%. And drug store companiestypically have limited expansion plans, creating increasedcompetition among buyers and further adding to the cap ratedecline.

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“Walgreens is making a better return on investment by renovatingexisting stores rather than building new ones,” Blankstein says.“It's a lower cost and quicker return.” He does not expect to seemuch expansion from the brand “until the majority of stores get tothe new, upgraded model.”

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Brian J. Rogal

Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.