Walgreens and CVS are safest tenants for retail investors

A CVS and Walgreens

Ever wonder why every other empty retail space seems to be snapped up by a drugstore? It’s because drugstores are the safest tenants, according to a Marcus & Millichap report cited by Retail Traffic magazine.

In fact, Walgreen and CVS both come with investment-grade credit ratings from ratings agencies, making it easier to obtain financing to buy their locations. Combined with the long-term nature of typical drugstore leases (they often start at 20 years with renewal options for as long as 75 years), the rating makes investing in them more like purchasing safe, long-term bonds than many other real estate ventures.

Nationwide, drugstore sales were up 10 percent in the first half of 2011, and the median price for buying a drugstore-occupied retail space was $334 per square foot, up 3 percent. Cap rates for Walgreens and CVS are at 6.8 and 6.9, respectively, about 100 basis points lower than the cap rate for net leased retail properties as a whole.

The report notes that Rite Aid is the exception to the rule, as it has a Standard & Poor’s credit rating of just B-, meaning it is on the watch list for default. As a result, properties with Rite Aid for retail are only trading at cap rates as high as 9 percent. [Retail Traffic]