CHICAGO—Cap rates for net lease properties have been falling for quite some time, often hitting historic lows, but investors find few sectors as appealing as drug stores. And according to the most recent report from the Boulder Group, a commercial real estate services firm located in suburban Northbrook, IL, in the third quarter of this year cap rates for many top drug store brands fell again.
“Walgreens cap rates remained stable at their previously reached historic low level in the first quarter of 2014,” according to the new report. But cap rates for CVS and Rite Aid properties sank 15 bps and 35 bps, respectively, since hitting their own historic lows in the first quarter. The Walgreens rate now stands at 5.6%, with CVS at 5.75% and Rite Aid at 7.4%. 1031 exchange buyers and private investors remain the primary buyers.
“Investors are attracted to these properties partly because they are one of the few opportunities with tenants that sign leases of 20 years or more,” Randy Blankstein, president of Boulder, told GlobeSt.com. In fact, although the overall rate for Walgreens properties remained stable, rates for Walgreens properties with more than 20 years of lease remaining compressed by 20 bps to 5.3%.
All of this investor interest has brought significant changes to the market. In the first quarter of 2014, long-term leased Walgreens and CVS properties accounted for 50% of the market compared to 35% in the third quarter of 2014. Walgreens' recent change from 25-year lease terms to 20-year lease terms has left a limited supply of drug stores with more than 20 years left on the lease.
And owners appear ready to take advantage of the current demand. The number of drug store properties on the market increased across all three major tenants by 33% in the third quarter. CVS saw the largest increase, with 74 stores on the market, up from 45 in the first quarter, an overall gain of 64%. “The biggest contribution to the supply of CVS properties is from former zero cash flow properties where the owner has defeased the fully amortizing loan,” Boulder noted.
In 2015, Boulder officials expect investors' demand for drug stores will not slacken, and transaction velocity in the sector should maintain a pace similar to 2014. “Most people believe that pharmacies will always do well, especially since, unlike a lot of 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.
