How are Net Lease Drugstore Space Fundamentals?

In talking with Jason Powell, senior director at Stan Johnson Co., GlobeSt.com learned that a single-tenant drugstore investment can be a good option for a first-time buyer. Find out why in this <b>EXCLUSIVE</b> Q&A on the subject.

GlobeSt.com: How are real estate fundamentals in the net lease drugstore space today?

Jason Powell: Over the past two years, the drugstore investment landscape has been changing with overall sales volume trending downward and cap rates inching upward. Looking back over the past five years, the peak sales volume, inventory absorption rate, and cap rate lows all occurred in mid- to late-2016. Based on our research, since first quarter 2017, overall drugstore transaction volume declined by approximately 40 percent, while inventory on the market for sale has increased by around 40 percent. On average, cap rates for CVS Pharmacy and Walgreens are between 18 and 33 basis points higher than they were in fourth quarter 2016, however cap rates for stores in prime locations with long-term leases have remained close to where they were in 2016. Walgreens and Rite Aid properties have been the slowest to move, as inventory has accumulated in markets where there is store overlap, creating concerns over potential store closures.

What makes a single-tenant drugstore investment a good option for a first-time buyer?

A single-tenant drugstore investment can be an excellent option for a first-time investor looking for stable cash flow over a long period of time (10-20 years). We are still in a low-rate environment, and a single-tenant drugstore investment can offer first-time buyers a real estate investment with a five-to-six percent annual return secured by a long-term 15+ year corporately-backed lease with multi-billion-dollar lease guarantors. Most single-tenant drugstore locations are in areas with strong demographics and high traffic counts, often at signalized intersections. With over 21,000 store locations across the U.S. (CVS Pharmacy, Walgreens, and Rite Aid), buyers tend to be more familiar and comfortable with single-tenant drugstores when compared to other national or regional retailers, office, industrial, or medical product.

How does the drugstore industry differ from five years ago, from a seller’s perspective?

Five years ago, inventory for sale was getting absorbed at a faster rate and transactions took less time and energy. As a seller, it’s going to take more time and patience to sell your property in today’s market, and you will need to team up with the right people to devise a sales strategy to separate your offering from the pack and get your property in front of the right prospects. It’s important to know how your property rates in comparison to other similar properties on the market, and to know what attributes are currently most important to buyers. Location, lease structure, lease term remaining, price point, and rent/sales ratios are all key components to track as you look to sell your property. Reaching that one 1031 exchange buyer who needs your price point can make the difference between a successful and unsuccessful marketing campaign.

What are your predictions for 2019 and beyond?

If trends continue, cap rates overall will likely rise in 2019 as sellers start discounting properties that have been listed for sale for six months or longer. However, stores in premier locations with long-term leases could see less of an impact if interest rates remain low.