Net Lease Drug Store Cap Rates Shatter Records


percentage downCap rates for single tenant CVS, Rite Aid and Walgreens properties reached a new historic low in the net lease drug store sector in the third quarter of 2015.

Cap rates continued to decline as investors flock to the net lease space’s cornerstone asset, drug stores. With historically low cap rates, the drug store property supply has increased drastically by over 20% as owners attempt to take advantage of unprecedented high values. While overall cap rate levels experienced compression, short term leased Rite Aid properties with 5-9 years of lease term remaining had the greatest cap rate compression of 85 basis points in the third quarter of 2015. New construction CVS properties experienced the second greatest compression of 50 basis points to a 5% cap rate, the same level for new construction Walgreens assets. These levels can be attributed to the historically low interest rate environment coupled with high demand amongst 1031 exchange buyers for long term leased properties in a market constrained by limited expansion plans for drug stores tenants.

With cap rates for Walgreens and CVS at all-time low levels, the ratio of long term leased drug store properties (20 years or more) to the total supply has decreased when compared to the third quarter of 2014 and total overall supply of long term leased drug stores declined by 27% in the same time period.

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