Net Lease Investors Can Relax About Rite Aid

The drugstore net-lease market is one of the more vibrant retailer sections of net-lease investment, featuring three major players: Walgreens, CVS, and Rite Aid.

Given recent headlines of Rite Aid’s recent filing of Chapter 11 bankruptcy, one would perceive that the industry is in trouble, according to Daniel Taub, National Director of Marcus & Millichap’s Retail Division, speaking on a recent news video by the firm.

However, don’t let the headlines fool you, he said.

“Rite Aid’s bankruptcy has been anticipated for many years and it should be a net positive for them as well as for both CVS and Walgreens and from a real estate perspective,” according to Taub.

Historically, Walgreens and CVS traded at a premium relative to Rite Aid based upon the quality of the business as well as the real estate in those markets which they operate.

All three stores have been going through a physical store rationalization over the last three to five years for varying reasons.

“That does not mean that they’re moving away from their physical store commitment,” Taub said. “In fact, it’s doubling down. It’s reinforcing the physical demand as it moves to health and wellness and other business lines in addition to the traditional pharmacy and convenience food offerings.”

Net-lease retail investment sales still is a strong viable investment opportunity, despite the typical headwinds.

“That does not mean that one strays away from the opportunities that are existing in the sector,” Taub said. “There’s a variety of opportunities and issues. And don’t forget, net-lease retail investments provide more than just a return.”

He listed depreciation, taxes, and long-term benefits to the sector, “which is only getting stronger as physical retail remains the number one choice for where consumers want to get their goods,” Taub said.

Furthermore, in many instances, the bankruptcy of Rite Aid and the current environment could be a positive in the long run for these investors, looking for quality net-lease retail investments.

One of the issues that the net-lease sector is facing is the volatility in the capital markets over the past 12 months, Taub said. There are rising interest rates and a decreasing lending pool.

“As a result, combined with the fact that we have an imbalance between supply and demand of product to buyers and a dislocation between valuation, you’re seeing a buildup in inventory and a significant slowdown in transactions,” Taub said.

“As a result of the decrease in multifamily sales where the majority of investors, if they do not stay in multifamily are going to net lease retail, that falloff in investor has impacted sellers, developers, and pricing.

“Combine that with the rise in interest rates and the dislocation between private investors, return expectations, and seller needs, we’re at a stalemate.

“The market remains frozen in that regard,” according to Taub.