What’s Next for the Drugstore Single Tenant Net Lease Category?

As 1031 investors attempt to navigate through fulfillment of their exchanges in this uncertain marketplace, investors are turning to essential properties such as drugstores to place their capital. Investor activity in the net lease space for credit tenant properties has remained strong⁠—and in sectors such as drugstores, it’s even stronger than before the shutdown.

The question is whether this will be a return of the single tenant net lease drugstore market to the levels in which they traded before Walgreens announced it was acquiring Rite Aid in October 2015.

At that point, we saw a shift in market momentum where investors pivoted away from drugstore properties in anticipation of a large amount of store closures due to the prospect for more of these types of mergers and acquisitions.

A typical long-term Walgreens deal had been trading around 30 to 100 basis points higher than a similar CVS. Similar Rite Aids “non-coastal” traded at 200 to 250 basis points higher than a similar CVS. During this period, we also saw market terms increase from three to five months in 2015 to six to 12 months of market time before COVID 19.

Within the first two weeks of COVID-19 the drugstore companies came out posting stronger than usual sales. Rite Aid CEO Heyward Donigan reported on CNBC that “their sales are at highs never seen before in company history.”

What is next for the drugstore single tenant net lease? We continue to see a strong demand for pharmacy properties and hear from investors about the creditworthiness of Walgreens and CVS. Looking ahead, properties that have essential tenants will be viewed differently than properties that are considered non-essential. Investors still want to see consumers go into the stores and know that there is activity level in the stores.

With the extension of the 1031 deadline through July 15, investors that qualify for the extension are staying on the sidelines. Properties in good locations will be acquired first while properties with less attractive sales or poor locations will trade at low cap rates closer to the July 15 deadline.

Finally, due to buyer unwillingness to get on an airplane to view properties, investors are pivoting towards properties within driving distance to avoid airplane travel. And in certain parts of the country, like the northeast, we are hearing of a shortage of quality long-term pharmacy properties in good markets that are available. A recent search showed that a good amount of the single tenant net lease pharmacies on market were in less desirable markets.

Sean Lutz is SVP of the National Net Lease Group at SRS Real Estate Partners.