CRE Investors Brace for Impact as Walgreens Plans 1,200 Store Closures

The latest announcement that Walgreens Boots Alliance would close about 1,200 stores, largely cashflow negative and underperforming, over the next three years, with 500 to be shuttered in 2025, has continued investors’ punishment. Stock prices at $10.45 at Monday’s close were less than half of where they started the year. Market worry is broader than just Walgreens.

Problems are widespread among the large drugstore industry. CVS has lost 28% of its value since January 1 and is laying off 3,000 people. In September, privately held Rite-Aid emerged from bankruptcy after cutting $2 billion from debt.

That is for investors in certain areas of retail. For the CRE industry, the equally large question has been what will happen to the leased real estate.

There seems little doubt that Walgreens has faced financial pressures. “Walgreens is taking a first step that it absolutely must make in order to ensure its continued survival,” Richard Traub, partner at the law firm Smith, Gambrell & Russell, told GlobeSt.com in emailed comments. He added that the company would take a “short-term hit to its bottom line” but should “see sustainable benefits over the next several years.”

That leaves aside the concerns of those in the CRE industry. Property owners and investors must be concerned.

In its 2023 annual report (the FY 2024 one hasn’t yet come out), the company mentioned an estimated 8,700 stores operating in the U.S. Closing 1,200 stores is about 14%. CVS is closing 900 stores, and Rite-Aid plans to close 500, according to CNN.

Retail pharmacies feel multiple financial pressures. The Federal Trade Commission among others has noted that pharmacy benefit managers — the middlemen between manufacturers and drug stores — have a significant impact on the profit levels of drug stores of all sizes. And then, all the other product lines the stores sell face significant competition from low-cost major sellers, online and physical.

In theory, owners of properties that major drug stores lease should be in good shape, as Jonathan Hipp, principal of U.S. capital markets and head of the U.S. net lease group for Avison Young, told GlobeSt.com in July. The reason was the quality of the real estate.

However, the current number of expected closures is much higher than expected in the summer. “They have good real estate, but what if lenders don’t want to refinance them?” Hipp told GlobeSt.com. “Can you get a lender to lend? Because perception is reality.” Lenders, and even landlords, might not have visibility into actual store sales. Selling a property, particularly if there is a good amount of time left on a lease, might be difficult with cap rates rising — perhaps sharply, depending on perceptions and local conditions.

It may be worse as the CEO of Walgreens recently noted that 100% of the company’s profits come from only 75% of its locations. The 1,200 stores to close could conceivably be joined by others.

Trepp has done an analysis and said that Walgreens’ “substantial presence as a tenant at properties collateralizing commercial mortgage-backed securities (CMBS) means these closures could have broad ramifications for CRE investors, lenders, and CMBS bond investors alike.” The chain is a retail tenant in properties backing $3.69 billion in CMBS loans (853 properties). That compares to $2.15 billion (278 properties) for CVS and $743.1 million (102 properties) for Rite-Aid.

Trepp also notes that retail CMBS delinquency rates have been rising throughout 2024, with CVS at 4.35%, Walgreens at 5.46%, and Rite-Aid at 11.82%.