What should the asking cap rate of a new Walgreens lease be? A survey of today’s offerings suggests in the 5-6% range. However, those rates do not line up with reality and act as if Walgreen’s credit was never downgraded. In-fact asking cap rates for Walgreens do not appear to have changed since the downgrade was first discussed in June and implemented in August. It’s as if sellers are trying to prop up the Walgreens brand by will power alone. The reality is closing rates have risen since downgrade but asking rates have not.
At the beginning of 2012, Walgreen’s was the clear premier asset in the Pharmacy sub-market and their closing rates reflected that – averaging 6.52% compared to 7.30% for CVS. That reality began to change in June – when the downgrade was first discussed. With CVS and Walgreens roughly equivalent in credit rating (CVS has a slight edge with a BBB+ compared to BBB for Walgreens) the rental bumps generally featured in CVS leases made CVS a more attractive option to many investors. The Walgreens brand was heavily supported by their high credit rating – is was probably their biggest selling point – to ignore the affects of their credit downgrade is to ignore reality.
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Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
