Despite Uncertainty, Drugstores Continue to Provide Value

Real estate buyers increasingly opt for single-tenant net lease (STNL) properties as low-maintenance investments with consistent and predictable cash flows. One common type of STNL property is a drugstore. Because of their historically low cap rates in retail, drugstores have drawn attention from private investors and 1031 exchanges as primary buyers. There are approximately 21,000 drugstore chains (e.g. CVS) and 19,500 independent pharmacies in the U.S., according to a recent Drug Channels Institute report. Currently, Walgreens, CVS, and Rite Aid make up the top three drugstore chains in the U.S.

Recent years marked a noticeable shift for retail pharmacies. In October 2023, Rite Aid filed for bankruptcy, while over the last two years, the top three drugstores announced plans to close more than 1,500 stores collectively. McKinsey cites saturated retail locations, ongoing labor shortages, and inflationary pressure as causes of change. But it appears that drugstores are rationalizing—not limiting—operations. In other words, some retail properties may face consolidation or elimination, though not as a reflection of performance.

In-store demand for drugstores is as strong as ever despite industry headwinds. In November 2023, monthly retail sales of U.S. pharmacies and drugstores reached an all-time high of $30.7 billion. The annual drugstore market is expected to grow at a 6.3 percent CAGR to $861.7 billion by 2028, up from $560 billion in 2021. As the three largest U.S. pharmacies, CVS, Walgreens, and Rite Aid account for over 65% of industry revenue. Here’s how drugstores continue to deliver value while navigating an uncertain industry shift.

CVS Beats Wall Street Expectations (Again)

Health reported an 11.9 percent increase in fourth-quarter revenue compared to the previous year, from $83.8 billion in 2022 to $93.8 billion in 2023, higher than Wall Street projected. Fourth-quarter profits reached $2.05 billion, also beating expectations, while for the year, CVS reported near-double profits of $8.3 billion, up from $4.3 billion in 2022. The drugstore giant’s revenue for 2023 increased 10.9 percent year-over-year to $357.8 billion, and it expects earnings per share to reach $8.30 this year.

The results come as a reminder of the industry’s resilience. In 2021, when CVS announced plans to close 900 stores, it aimed to “reduce store density in certain locations.” The retailer’s recent performance indicates that the consolidation wave may have peaked; organizations are now focused on improving operating margins and exploring growth opportunities in healthcare services, primary care, and vaccinations.

Walgreens Tackles a Challenging Industry

Amid an ongoing shift to healthcare services, Walgreens beat Wall Street expectations on revenue and earnings per share in its first quarter. The chain announced a 10.0 percent increase in first-quarter sales compared to the prior year, up 8.7 percent to $36.7 billion, indicating sales growth in its U.S. Retail Pharmacy segment and sales contributions from its U.S. Healthcare segment. Perhaps more interestingly, Walgreens cut dividends for the first time in 47 years. The healthcare provider has been making dividend payments for over 90 years, so the move signals an attempt to improve its performance. According to Walgreens CEO Tim Wentworth, who joined the company in October 2023, its fiscal first-quarter results align with expectations and reflect disciplined execution in a challenging consumer backdrop.

Walgreens is among the top three drugstores in the U.S., with over 9,000 retail pharmacy locations. Business unit growth and strategic moves like VillageMD’s acquisition of Summit Health helped boost the chain’s above-expected revenue performance. Previously, Walgreens had worked with VillageMD to expand to clinics and doctor’s offices, hoping to provide more accessible, service-based care. But in 2024, the healthcare chain will close 60 VillageMD clinics to focus on density in “high opportunity” markets.

Rite Aid Seeks to Lean Out

Unlike CVS and Walgreens, Rite Aid claims a smaller portion of the U.S. retail pharmacy market, making it much more sensitive to the latest industry headwinds. The chain announced in October 2023 that it was filing for bankruptcy, and since then, numerous Rite Aid store closures have been announced across the country. States with the highest number of closures include California, New York, and Ohio. After the adjustment, Rite Aid will maintain around 1,700 stores.

What Rite Aid plans for the remaining stores is unclear, though it represents a potential investment opportunity for buyers. Investors will recall the drugstore chain’s merger attempts in recent years, first with Walgreens and then with Albertsons. While both mergers fell through, the message is clear that Rite Aid is committed to improving access to critical health services.

A High Demand for Drugstore Investments

The demand for drugstores remains high because of four main factors: A scarcity of stores with 10-plus-year leases, a small development pipeline, investors’ preference for critical retailers, and drugstore tenants’ investment-grade credit ratings.

Drugstore and pharmacy pricing outperforms the broader retail market and is most substantial in single-tenant net lease (STNL) retail. The benefits of investing in drugstores and pharmacies include:

• Lease terms typically range from 20 and 25 years (including renewals), meaning the chances of a pharmacy “going dark” are low.
• Drugstore tenants are usually responsible for maintenance and repairs, insurance, property taxes, and build-outs under a single-tenant net lease.
• Drugstores typically claim prime real estate at high-traffic intersections, visible pad sites, or outparcels of commercial centers.

The simple STNL structure reduces ownership services and allows investors to reap the benefits of commercial real estate ownership without the hassle of day-to-day property management. Drugstore properties are also much more stable if they are a well-known tenant like CVS or Walgreens. Overall, owning a drugstore or pharmacy continues to be profitable for owners who gain added resilience and security in a shifting market.