Did you know that the retail pharmacy sector is considered a safe and smart investment? Why are retail pharmacies an attractive real estate opportunity? In this article, we will take a closer look at what retailers are leading the way, how retail pharmacies become good investments, and how you can benefit from expanding your real estate portfolio to include this type of property.
Two Companies Lead the Way
The top two retail pharmacy companies in the US are Walgreens and CVS Pharmacy. Not only do they top the list of the number of locations offering health care services across the country, but they both have investment grade credit ratings of BBB. Each company has been active in meeting changing trends. Currently, Walgreens and CVS are involved in various rebranding activities ranging from strategic acquisitions, mergers, to updates to their retail models.
These changes will keep retail pharmacy services relevant and competitive against the growing number of online pharmacies. Walgreens purchased 1,932 Rite Aid stores in 2018. CVS purchased health care company Aetna the same year. These moves expand their brick-and-mortar footprint and make health care services more accessible to the individuals who need them most, which creates a new revenue stream.
Becoming Amazon Proof
Amazon has expanded into virtually every possible market, niche, and retail sector, and many companies seek ways to Amazon-proof their businesses. In our online age, paradoxically what makes Walgreens and CVS attractive to investors are their brick-and-mortar locations. Both companies have retail pharmacies sitting on prime real estate. Typically, the properties are in the core of busy downtown centers or situated along high traffic routes with easy access.
More On the Store Models
In bigger cities, it’s not hard to find a Walgreens on one street corner and a CVS across the street. Both companies’ retail stores are usually standalone sites on a large property pad anchored by a shopping center or a large retailer to generate foot traffic. Additionally, both brands rely on drive-through lanes to support the high-profit earnings that result from prescription pickups. Becoming identified during the pandemic as an essential business did not hurt matters, either.
What Makes Retail Pharmacies Attractive Investments?
There’s more to retail pharmacy opportunities than just the prime commercial real estate locations. Two other key factors are long-term leases and the lease structure.
Typically, a retail pharmacy has a lease that runs between 20 and 25 years. This greatly reduces the risk of defaulting on rent and abandoning the building. The security that comes from having a long-term lease in place makes this type of investment very attractive to first-time landlords or individuals seeking opportunities to expand their real estate portfolio.
Using a triple net lease (NNN) arrangement is the best option for property owners. It shifts the responsibility of many landlord-related tasks to the tenant. For example, property taxes, repairs, and maintenance, insurance, landscaping, etc. are paid for by the tenant. This increases the profitability of the retail pharmacy property for the investor. To learn more about Walgreens property for sale, you can visit Pharma Property Group.
How Retail Pharmacies Perform
Over the past few years, the retail pharmacy sector has averaged lower than single tenant net lease (STNL) investments. Estimates put the difference at about 20 basis points (bps). This was verified in 2017 when both Walgreens and CVS were sitting at low cap rates. The cap rates eventually leveled out to meet the national average for STNL investments. The cap rates have been consistent up to the pandemic, making retail pharmacies a desirable investment because they continued to meet their rental and lease commitments. Being identified as essential businesses ensured they would continue to serve customers, generating revenue at a time when other retail sectors had closures or very limited capacity.
What The Future Holds
Several factors will keep demand high for retail pharmacy investment. They include:
As the demographics shift to older individuals, the need for medications increases.
Return On Investment (ROI)
Statistics show that retail pharmacy investment provides an attractive ROI.
With all costs falling on the shoulders of the tenant, property owners get a huge break.
Essential Business Designation
With this label, investors are guaranteed that their retail pharmacy property will not close.
High-traffic, easily accessible locations guarantee steady business from all demographics.
BBB Credit Rating
Nothing guarantees a successful lease application like a solid BBB credit rating.
More On the Future of Walgreens and CVS
Both retail pharmacies are in the process of rebranding. CVS has added the HealthHUB concept to 1,500 of its locations. The HealthHUB model includes exam rooms, health kiosks, an in-house dietitian, nutrition counseling, and chronic care management services. All of this is built into 20 percent of the space occupied by a CVS location. Both Walgreens and CVS have also been exploring the success of smaller-sized stores. The purpose of the downsized prototype is to give both brands access to markets they have not entered yet. The smaller stores also reduce overhead costs and ensure profitability. This brings the price tag for these smaller stores within the range of investors who could not otherwise afford such an opportunity.
Changing health care service trends are being addressed by two large retail pharmacies in the US. Walgreens and CVS provide excellent investment opportunities based on several factors. However, as the delivery of these services changes to meet the demands of an aging population, there is no better time to become a franchise owner than now. Both of these solid performers have bright futures simply because of how they are responding to various threats. Online competition and changing needs based on population demographics are why these brands remain relevant, making either Walgreens or CVS a solid investment with a great future.