Broker Predicts Walgreens Cap Rates Hit 8% in 2009

SEATTLE-Cap rates are on the rise for Walgreens drugstores–considered by many to be a bellwether for the broader net lease property market–and one expert thinks they have a ways to go before any stabilization sets in.

According to a new market analysis by Jeffrey Thomas, Seattle-based senior vice president in the net-leased properties group of CB Richard Ellis Group Inc., average asking cap rates for Walgreens properties rose to 6.82% in January. Thomas predicts another approximately 100-basis-point increase in cap rates for Walgreens assets before the year is over.

Early last summer, Thomas found asking cap rates for Walgreens properties averaged 6.48%.

“We see nothing that suggests a reversal in this pricing trend, and expect the Walgreens average asking cap rates to break 7% very soon and continue north throughout the year,” according to Thomas’ recent market update. “We fully expect to see the Walgreens average asking cap rate reach 8% at some point in 2009 and for continued cap rate expansion across the net-leased market.”

Further, Thomas’ analysis says a significant portion of available Walgreens properties being marketed at below-7% cap rates is becoming stagnant, resulting in increased inventory and skewed average cap rates. But many properties are being removed from the market for re-pricing, he adds, and eventually new numbers will better reflect realistic values for today’s market.

“With the debt markets becoming increasingly unfavorable since early last fall, we have witnessed a flood of Walgreens properties being marketed at cap rates higher than 7%,” Thomas’ report states. “In fact, the majority of properties that are being re-priced to generate more interest are already being marketed at cap rates higher than 7%. Our expectation is that the current supply of more than 200 Walgreens properties in a demand-constrained market will continue to apply upward pressure on cap rates.”

Some 150 Walgreens assets (not including ground leases and multi-tenant property/portfolio listings) were among the net lease properties listed as available for sale when GlobeSt.com visited www.nnnex.com earlier this week. Of these, less than half (66) were listed with asking cap rates below 6.75%. Of those with higher cap rates, 20 had asking caps of 6.75% to 6.99%, 43 had cap rates between 7% and 7.49% and 21 had cap rates of 7.5% or higher. Listings ranged from a low asking cap rate of 5.25% for a triple-net Walgreens in Fresno, CA to a high of 11.01% for a double-net store in Indianapolis.

New data from Real Capital Analytics Inc. shows rising cap rates for the overall drugstore property segment, too. According to RCA’s research, the 12-month average cap rate for drugstore property sales at the end of 2008 was 6.42%, a 13-basis point increase from the prior year’s fourth quarter. RCA tracks sales of properties and portfolios of $5 million and more.

Not surprisingly, the volume of drugstore property sales in 2008 was almost half what it was in 2007. According to RCA’s data, some $761 million of drugstores traded hands during 2008, compared to about $1.38 billion in 2007. Fourth quarter 2008 volume of just $140 million was the lowest quarterly volume in four years.