NORTHBROOK, IL—This has been a historic year for single-tenant net leased properties, with cap rates sinking to lows not seen in years. And The Boulder Group, a commercial real estate services firm located in suburban Chicago, has just released a report that shows cap rates for top drug store brands in the sector have fallen since the fourth quarter of last year.
“Properties tenanted by Walgreens, CVS and Rite Aid experienced cap rate compression of 65, 53 and 100 bps, respectively, during this time frame,” according to the new report. “Over $1 billion of drug store transactions occurred in the third quarter of 2013, which represents the largest volume of any quarter in the past three years.”
The Walgreens rate now stands at 5.75%, with CVS at 6.07% and Rite Aid at 8.0%.
However, even though their cap rates sunk, the supply of properties tenanted by Walgreens and CVS increased significantly. In the fourth quarter of 2012, for example, 86 Walgreens were on the market, and in the third quarter of this year, that number had increased to 156. And during the same time period, CVS properties on the market went from 30 to 44. But according to Boulder's report, “the overall increase in supply to the drug store sector is attributed to sellers adding older or properties with short lease terms to the market in attempt to take advantage of the low cap rate environment in this sector.”
Newly-constructed Walgreens and CVS properties remain the most attractive to investors, Boulder finds, since they are one of the few net lease products with leases longer than 20 years. But since cap rates for these new properties have sunk so low, many investors have also started to buy older product. "In the third quarter of 2013, properties constructed prior to 2007 accounted for 58% of all drug store transactions which represented a 10% increase from the third quarter of 2012.”
The cap rates for properties in this sector are so low institutions won't be able to meet their return thresholds, Boulder concludes, so private and 1031 exchange investors will continue to be the most active.
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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.
