The Boulder Group announced the release of its Net Lease Drug Store Report today.
In the third quarter, national asking cap rates in the single tenant drug store sector increased to 6.39 percent, according to the 2020 Net Lease Market Report. This represented a 17 basis point increase when compared to the prior year.
Cap rates for Rite Aid and Walgreens properties experienced cap rate increases of 19 and 15 basis points respectively. However, single tenant CVS properties experienced a 10 basis point decrease.
“Throughout 2020, net lease investors focused on essential retailers and accordingly the drug store sector experienced a significant increase in transaction volume,” said Randy Blankstein, President, The Boulder Group. “Transaction volume for single tenant drug stores increased by more than 30 percent in 2020.”
According to the report, the main factor for the increase in cap rates for the drug store sector was a shorter average remaining lease term which dropped to 10 years in the third quarter.
“Throughout the pandemic the three main drug store tenants, CVS, Rite Aid and Walgreens did not ask for any rent relief or concessions,” adds Jimmy Goodman, Partner, The Boulder Group. “These tenants remained open due to their essential status and continued to pay rent on time.”
Despite the increased demand for single tenant drug stores, this sector provided a degree of value for its investors. In the third quarter of 2020, the net lease drug store sector was priced at a 33 basis point discount to the over net lease retail sector. This was primarily attributed to the aging supply of drug store properties with a shorter lease term.
“The significant demand for drug store assets combined with the increased number of transactions has depleted the sector of quality assets,” John Feeney, Senior Vice President, The Boulder Group adds. “When compared to 2019, the overall supply of single tenant drug store properties decreased by approximately 10%.”
Furthermore, the supply of long term leased properties has decreased as well. In 2019, leases with more than 15 years remaining on their primary term made up approximately 25% of the market. In 2020, this segment has decreased to approximately 15% of the market.
“Transaction velocity for the remainder of 2020 should continue to favor essential retailers with drug stores being a beneficiary of the increased demand,” according to Blankstein.
Private and 1031 exchange investors will continue to be the primary acquirers of single tenant drug stores as they seek the stable cash flows this asset class offers.
With the current uncertainty throughout net lease sector, the majority of investors are focused on net lease drug stores with longer term leases and primary market locations.