CHICAGO—Cap rates for net lease properties have been falling forquite 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, in thethird quarter of this year cap rates for many top drug store brandsfell again.

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“Walgreens cap rates remained stable at theirpreviously reached historic low level in the first quarter of2014,” according to the new report. But cap rates forCVS and Rite Aid properties sank15 bps and 35 bps, respectively, since hitting their own historiclows in the first quarter. The Walgreens rate nowstands at 5.6%, with CVS at 5.75% and Rite Aid at 7.4%.1031 exchange buyers and private investors remainthe primary buyers.

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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, told GlobeSt.com. In fact, although the overall rate forWalgreens properties remained stable, rates for Walgreensproperties with more than 20 years of lease remaining compressed by20 bps to 5.3%.

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All of this investor interest has broughtsignificant changes to the market. In the first quarter of 2014,long-term leased Walgreens and CVS properties accounted for 50% ofthe market compared to 35% in the third quarter of 2014. Walgreens'recent change from 25-year lease terms to 20-year lease terms hasleft a limited supply of drug stores with more than 20 years lefton the lease.

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And owners appear ready to take advantage of thecurrent demand. The number of drug store properties on the marketincreased across all three major tenants by 33% in the thirdquarter. CVS saw the largest increase, with 74 stores on themarket, up from 45 in the first quarter, an overall gain of 64%.“The biggest contribution to the supply of CVS properties is fromformer zero cash flow properties where the owner has defeased thefully amortizing loan,” Boulder noted.

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In 2015, Boulder officials expect investors' demandfor drug stores will not slacken, and transaction velocity in thesector should maintain a pace similar to 2014. “Most people believethat pharmacies will always do well, especially since, unlike a lotof other retail, pharmacies are resistant to internet competition,”Blankstein said.

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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.