Savannah Duncan
Single-tenant drug stores are flying off the market. Investor demand for higher quality properties in this asset class, such as Walgreens, CVS/pharmacy and Rite Aid properties, outweigh demand for the entire net lease sector, according to The Boulder Group’s Net Lease Drug Store Report.
“National drug stores are trading at a 50 basis point premium compared to the rest of the single tenant net lease market,” says Randy Blankstein, president of The Boulder Group. “This can be attributed to a limited supply of assets and quality tenants with lease terms more than 20 years. The aging demographics in the U.S. are increasing the use of pharmaceuticals and that has been very positive for the retail pharmacy sector.”
In the second quarter of 2012, median asking cap rates for single-tenant drug stores compressed by 20 basis points on a year-over-year basis. In the second quarter of this year, the median asking cap rate for Walgreens was 6.45 percent, compared to 6.8 percent a year earlier. CVS/pharmacy had an asking cap rate of 6.7 percent in the second quarter, compared to 6.9 percent this time last year. Rite Aid had the highest asking cap rate at 9.2 percent, down from 9.23 percent this time last year.
Blankstein says the main investors during the past year have been older, high net-worth individual investors seeking higher yields in place of their current bond portfolio.
The report states the average asking price is $5.46 million for a Walgreens property, $3.28 million for a CVS/pharmacy and $2.88 million for a Rite Aid.
For new properties with 20 years or more of lease term remaining, cap rates remain in a fairly tight range regardless of location, Blankstein says. However, for older properties, investors have been more focused on store sales as the most important metric and the location has been a secondary consideration.
One of the factors driving cap rates down is the lack of new construction. According to the report, supply of new drug stores decreased by 19 percent compared to 2011. So far in 2012, Walgreens has constructed 175 stores, CVS/pharmacy has built 300 stores and Rite Aid has had zero construction activity.
“Drug store tenants have been focused on modernizing their existing stores versus new construction due to the current economic environment,” Blankstein explains. “It’s hard to determine when widespread new construction of drug stores will pick up again but safe to say it will be 2014 at the earliest.”
Blankstein anticipates the remainder of the year will continue to play out in the same fashion, with limited new construction starts and strong activity.
“The new development pipeline will remain fairly stable for the three national drug store chains,” he says. “In regards to acquisitions, activity will remain brisk as the price point and investment grade rating of Walgreens and CVS/pharmacy are in the sweet spot of many investors today.”
To read the full report, click here.
— Savannah Duncan