Drug stores are well known tenants of triple net lease (NNN) properties.
In addition to providing a secure, solid return on investment (ROI) to their owners, drugstore properties are often at the lower end of the price spectrum for triple net investment properties.
In combination, these characteristics create a considerable amount of intrigue around commercial real estate property that the biggest drugstore chains in the U.S. – Walgreens, CVS, and Rite Aid – occupy.
In terms of investment property, drugstores that offer essential pharmacy services and daily health products are similar to large fast food franchises: when they economy dips, their provision of goods at fair prices makes them virtually recession-proof. However, because drugstores offer critical pharmacy services, one could technically consider them more recession-proof than fast food chains. Drugstores are virtually indispensable for the following reasons:
- The population is growing and living longer; consequently, more people need medication.
- Old people typically need the most medications. Baby boomers are approaching retirement and will increase the need for pharmacy services and OTC medications from drugstores.
- Innovative drugs are being introduced to treat new illnesses or previously untreatable diseases. The availability of these drugs will increase the need for drugstore pharmacy services.
- Modern technology continues to introduce new health products that people make a part of their daily lives. These products are almost always available at drug stores.
- There are more surgeries being performed in the U.S. than ever before. The medicine people use to recover when they leave the hospital is acquired from drugstores.
- On the way to collect medicine from the pharmacy, drugstore customers pass by candy, soda, cosmetics, games, sunscreens, greeting cards and more. Drug stores have reported up to 35% of their total sales from non-pharmaceutical items.
These are some of the reasons why a large drugstore franchise can make an excellent real estate investment property. If you want to buy a triple net property, investing in a drugstore could give you the stability and level of income you need to make additional property investments. If you are considering buying a drugstore property, but you aren’t sure which franchise to choose, let’s take a look at the leading drugstore chains in the U.S stack up against each other.
Walgreens is considered the leading drug store chain in the US, with an S&P rating of BBB+. As of May 2013, the company operated over 8,500 locations in 50 states, the District of Columbia, and Puerto Rico. If you are looking for a safe, reliable triple net property, a Walgreens property is an excellent choice. The returns on Walgreens properties are higher than returns from US Treasury Bonds or Certificates of Deposit. Investors who want to own a real estate investment property that involves little risk should consider purchasing a Walgreens.
With an S&P rating of BBB+ and ranked 24th on Fortune 500, CVS is one of the largest pharmacy chains in the U.S. With approximately 6,200 stores in 40 states, and stores soon to open in Puerto Rico, the company continues to grow. CVS’ recent announcement that it will stop selling tobacco products sets it apart from its competitors in a unique way. Expect customers of other pharmacies to switch to CVS because they feel it is the “healthiest” pharmacy.
Rite Aid, which operates over 5,000 stores in 31 states and the District of Columbia, is the largest drugstore chain on the East Coast, and the third largest drugstore chain in the U.S. The Fortune 500 Company had some credit issues, and its S&P rating was recently dropped to B-. Investors who are willing to accept a bit of risk for a higher return should consider placing a Rite Aid property in their triple net real estate portfolio.
TIPS FOR PURCHASING DRUGSTORE PROPERTIES
There are hundreds of triple net drugstore properties available at any time. Whether you choose to purchase a property that Walgreens, CVS, Rite Aid, or another drugstore occupies, the helpful tips below will assist you with finding a drugstore property that is right for your investment goals.
- Purchase a property that has higher than average store sales. Not all the drugstores report total store sales, so it might be difficult to determine sales totals. If the store has a percentage lease clause, it should be easier to obtain store sales numbers from the seller.
- If a property has a pharmacy that is open 24 hours, it is typically a good location that draws many customers.
- Purchase a building that has the building specifications that drugstores — or a particular drugstore — looks for. This will raise the chances of the tenant renewing the lease.
- Below is a general list of what drugstores feel are most important to their operation.
- Highly visible location
- Corner lots with plenty of parking
- 12,000–14,000 sq. ft. rectangular, free standing buildings
- Drive Thru
- Building located in a highly populous or growing area
- Consider purchasing a zero cash flow property. Some drug stores are set up to allow investors to put less than 15% of the purchase price down and borrow the balance. On these triple net property deals, investors are also required to assume an existing fully amortized loan with zero cash flow. The income from the property is used to pay down the loan, which should be paid off in roughly 20 years.
This is a great investment for someone who has rental losses from other properties they own, as the income and losses will cancel each other out. This kind of investment is geared for a triple net 1031 trade buyer who is looking for a low down payment and a great tenant that has a desirable location that the buyer will own long-term.