CHICAGO—Drug stores are among the properties most desired by investors in the net lease market, especially those of investment-grade companies. And buyers recently snapped up several of these, both in the Chicago metro area and in tertiary markets in the Midwest.

“Drug store production has fallen,” Ralph N. Cram, president of Chicago-based Envoy Net Lease Partners, LLC, tells GlobeSt.com, and investors have turned to picking up restaurants, banks and other product as “a replacement for the drug stores that many used to buy.” 

In fiscal 2014, Walgreens, one of the most desirable brands, saw a net decrease of 273 stores after relocations and closings, the company's data show. Therefore, when they do hit the market, the competition can get intense.  

The Boulder Group, for example, a brokerage firm in suburban Chicago, has just completed the sale of a single tenant net leased Walgreens property located at 732 W. Old Ridge Rd. in Hobart, IN, just south of Chicago, for $6,093,000.

Boulder officials say the 15,120 square-foot store has exceptional sales and sits at the hard corner of a signalized intersection. Perhaps most important, the drug store chain demonstrated a strong commitment to this location by executing an early ten-year lease extension. The lease now has 16 years remaining and expires in December 2031.

Randy Blankstein and Jimmy Goodman of Boulder represented both the buyer and seller in the transaction. The seller was a Midwest-based institution and the buyer was a high net worth international investor.

Cap rates for Walgreens, CVS and Rite Aid properties reached a historic low in the first quarter of 2014, according to a Boulder study. And later in the year, rates for CVS and Rite Aid properties sank a further 15 bps and 35 bps, respectively. By the third quarter, the Walgreens rate stood at 5.6%, with CVS at 5.75% and Rite Aid at 7.4%.

“The market for Walgreens properties remains active as investors are attracted to investment grade rated companies with long-term leases,” says Blankstein, president of Boulder. Goodman, a partner, adds that “while single tenant properties are selling in all types of locations; core markets, like the Chicago area, are at the forefront of investor demand.”

Inland Private Capital Corp. helped illustrate the strength of the market by completing the sale of a 10,125 square-foot CVS property located at 500 Clifty Dr. in Madison, IN, for a gross sale price of $2,900,000. IPCC recently negotiated a 10-year lease extension with CVS, leaving about 14 years on the lease.   

The CVS property sits at an intersection at the north end of Madison, a city of about 12,000 residents located on the Ohio River and halfway between Cincinnati and Louisville.

“This was a custom deal we purchased in November 2005 and it performed as expected,” says Rahul Sehgal, chief investment officer of the Oak Brook, IL-based IPCC. “The result was a substantial return for our investors and an opportunity for them to invest a significant portion of the proceeds into another property owned by a different Inland-sponsored program.”

The property was sold at a premium to the original acquisition price, he adds. Coupled with cash flow generated during the holding period, the sale resulted in a total return to the investors of 139.77%.

As reported in GlobeSt.com, others in the net lease market have shown the popularity of brand-name drug stores far outside core markets. STREAM Capital Partners, for example, recently completed the sale of a Walgreens property located in Geneseo, IL, about 20 miles east of the Quad Cities. Walgreens has the property under a long-term lease, with about 19 years of term remaining. The sale price for this property was just over $5 million.

"Even though the location is considered tertiary, there are simply not enough Walgreens properties on the market to satisfy investor demand," Jonathan Wolfe, a managing principal and co-founder of STREAM, told GlobeSt.com. "As a consequence, investors are more focused on the underlying credit and lease term rather than location."