Drugstore Chains May Be Closing Stores but Some Real Estate Investors Still Want Them
Walgreens recently announced it was shuttering a couple hundred stores, and CVS Health said it would be curtailing plans to open new ones. That wasn't necessarily news to real estate brokers, who have become used to such reversals as retailers look to rightsize their operations to deal with changing shopping patterns.
Walgreens still has more than 9,000 stores around the country while CVS has about 9,900, making the chains still desirable tenants to many real estate investors.
“You definitely get questions” from investors looking to buy the properties, said Bryan Belk, a senior director of retail investment sales with FranklinStreet. “But we haven’t seen a lack of interest when we have listed them.”
Many investors look to buy what are known as net leases, in which the landlord has little or no financial responsibility for property expenses.
CVS and Walgreens are among the most sought-after properties, because the companies are regarded as relatively safe bets. The average annual yield, known as the capitalization rate, for Walgreens is about 6.15%; CVS is at about 5.65%.
John Feeney, senior vice president of Wilmette, Illinois real estate firm The Boulder Group said that “in the grand scheme of things, it is insignificant” that Walgreens is closing 200 stores.
It is significant if you own one of the closed stores, Freeney said. You may have to find a new tenant and face the possibility of accepting less rent. Drugstores, like banks, tend to pay higher-than-market rents, according to brokers.
The chains typically live up to the terms of a lease even when they close a store, but many target stores that are near the end of their lease to limit their exposure.
CVS Health leaders told investors they are evaluating some 500 lease renewals that come up each year. That could mean not renewing the lease and leaving an empty space.
Investors will likely feel the greatest impact with a dwindling stock of new properties to chase. Many tend to prefer new stores, because they can get leases ranging from 15 to 25 years.
Belk said CVS and Walgreens have been stretching out new store openings for years. CVS, in particular, plans to slow new store openings to 100 this year and just 50 next year. That’s lower than the typical 300 stores a year.
“That’s not many per state,” Belk said.
Before the recession a decade ago, the chains had been opening a lot more stores per state each year, he said. Then, it appears they hit a saturation point and the industry began to contract through mergers and store closings.
Walgreens, for instance, picked up 1,932 Rite Aid stores and distribution centers for $4.4 billion last year after getting over regulatory hurdles. Walgreens now has more than 500 surplus properties listed for sale, according to the company’s website.
In its latest earnings report, meanwhile, CVS said it would shutter 46 underperforming stores. It has closed others over the past decade, notably ones acquired through buying Eckerd, Osco Drugs, Sav-On Drugs and the standalone drugstores of grocery chain Albertsons.
CVS currently has more than 300 surplus properties listed for sale, including land, the company either leases or owns.
“CVS does a lot of self-development,” he said.
Invariably, the surplus properties find new tenants. Big Lots took over a Rite Aid in Clovis, California, last year. Convenience store chain Kwik Trip paid $1.3 million for a former Walgreens in West Bend, Wisconsin, CoStar data showed.
Dollar Tree has taken over several locations. For example, the chain subleased a former Walgreens in Tallahassee, Florida. That property is now for sale for $3.4 million.
