CHICAGO—Cap rates for single tenant net lease properties have been on a long-term slide, but more than any other sector, it's drug stores that really draw interest from investors.
“They are mostly investment grade, they have the longest lease terms and investors are very familiar with the brand names," Randy Blankstein, president of the Boulder Group, a net lease investment brokerage firm located in suburban Chicago, tells GlobeSt.com.
The company just released its latest report on the sector and found that cap rates for CVS, Rite Aid and Walgreens properties reached a new historic low in the third quarter. Furthermore, owners have attempted to take advantage of unprecedented high values, increasing the drug store property supply by more than 20%.
The median asking rates for Walgreens' properties sank to 5.50%, a decline of 10 bps from the second quarter. CVS dropped 30 bps to 5.45%, and Rite Aid fell 77 bps and hit 6.63%.
The big question hovering over the sector is how much the recent $17.2 billion takeover of Rite Aid by Walgreens will change things. "Most people anticipate that the number of store closings will be small," Blankstein says, as Walgreens works to eliminate redundancies. Still, that's an unknown, and "the attitude is one of wait-and-see."
"But at the same time, this deal is very beneficial to the sector as a whole," he adds. "Rite Aid goes from a non-investment grade to an investment grade company," and once the situation is clarified over the next few months, it should substantially increase interest in the market.
The big chains such as Rite Aid and Walgreens are doing very little new construction, Blankstein says, with the latter mostly concentrating on completing relocations and renovations. This should help keep competition sharp among investors during 2016.
He also expects private investors to remain the primary buyers. It has become increasingly difficult for institutional investors to acquire long term leased drug stores due to the low cap rates associated with these properties.
The annual RealShare Net Lease West conference will take place at The California Club starting November 11 and last two days. Hundreds of commercial real estate professionals from across the sector will cover new investment and finance trends and national net lease market conditions.
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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.
