Do you know what single-tenant net lease (STNL) properties are and why they are attractive investments? In the retail sector, pharmacies are often the most common of the STNLs and investors are turning to them as they represent not only a reliable and predictable cash flow but also because pharmacies are generally viewed as low-maintenance investments. That is, provided there is an STNL structure in place. In this article, we will explore why that is and review the advantages and disadvantages of this type of investment.
What Makes Pharmacies Such an Attractive Investment
The asking cap rates across the country for STNL pharmacies dropped in the third quarter of 2021 to 5.8 percent. According to GlobeSt.com, cap rates had dropped overall by 0.59 percent or 59 basis points. The trend hit record lows for CVS (dropping to 5.15 percent), and Walgreens (5.40 percent). This makes pharmacy investing a solid option, according to trusted real estate experts, like Pharma Property Group. Plus, investors were busy focusing on essential service retailers forcing the demand for pharmacy investments to exceed the supply.
Why You Would Invest in A Pharmacy
Pharmacy pricing has the most strength of all options in the STNL retail sector. According to GlobeSt.com, this alone permits pharmacies to outperform the entire retail market. There are also many other benefits to investing in a pharmacy. They include:
Typically, a pharmacy lease is for a period of 20 to 25 years. This reduces the risk of the pharmacy property being abandoned and remaining unoccupied.
It is most common for pharmacy leases to follow the single-tenant net lease (STNL) structure. This puts the responsibility of build-outs, property taxes, insurance, maintenance, and repairs on the pharmacy tenant and not the landlord.
Location, Location, Location
Pharmacies make good investments because they often appear in key locations in a community. Often this is near the center of the busy downtown hub or somewhere else where high traffic is the norm.
As by Baby Boomers hit their golden years, the demand for healthcare services increases. This includes easy access to the source of required medications and other treatments.
The Pros and Cons of Investing in Pharmacies
Because the structure of an STNL requires the tenant to cover landlord costs such as utilities, insurance, property taxes, etc., it is common for pharmacy companies to construct their building on property they have purchased. Then they sell the pharmacy and lease it back from the investor. This gives the tenant most of the ownership risk. But this is in exchange for a revenue stream that can be far more reliable than most other retail investments.
Here is a look at other pros and cons of STNL Investments:
Ownership Services Reduced
The lease structure of an STNL pharmacy drops the services required by the investor, which permits them to own commercial property and not be concerned over daily property management requirements.
Because the pharmacy lease structure is predictable, forecasting upcoming revenue streams is easier. This gives investors a stable and reliable cash flow during the life of the lease.
With either a national or regional pharmacy tenant, the risk of not meeting the terms of the STNL arrangement is reduced considerably. This gives the investor a great deal of stability compared to other tenant types.
Because STNL properties are usually purpose-built for a certain type of tenant and use, re-leasing to a different tenant type at the end of a term may be hard to accomplish.
Controlled Rent Levels
With a fixed annual rent increase that sits under the rate of inflation, rate compression is capped. This has resulted from the increased demand for STNL pharmacies.
Where To Invest in Pharmacies
Several US states have an abundance of pharmacies. There are as many that also have room for many more pharmacies. These statistics are worth taking a closer look at. Based on the number of pharmacies per 10,000 residents, North Dakota tops the list with the most at 3.38. Nebraska is next with 3.11 followed by Kansas (3.03), West Virginia (2.90), and Kentucky (2.89).
So, where are the best places to establish an STNL pharmacy based on demand? Oklahoma has just 1.19 pharmacies per 10,000 residents. California has 1.45, Rhode Island records 1.57, Hawaii has 1.63, and Arizona rounds out the list with 1.66. Bear in mind that the need for pharmacies continues to increase as the demographic requiring healthcare services keeps shifting.
Where Are the Pharmacy Investments?
There are currently more than 27,000 pharmacies and drug stores in business throughout the nation. Each state offers investment options and various pharmacy chains service either regional locations (a few states) or national locations (found in each state). The top three pharmacy chains currently operating in the United States include CVS Health, Walgreens, and Rite Aid Corp.
By The Numbers
Here is a further breakdown of the top three pharmacy chains in the country:
This top-level pharmacy chain has over 9,900 locations. These stores can be found in 49 states, Washington, DC, and Puerto Rico.
The second-largest national pharmacy chain currently has 8,965 locations in all 50 states. There are also Walgreens locations in Washington, DC, Puerto Rico, and the US Virgin Islands.
Rite Aid Corp
The third-largest US pharmacy chain has over 2,500 locations spread across 19 states.
Investing in pharmacies is a good idea. Not only do they provide a stable and reliable cash flow, but with a single-tenant net lease in place, the responsibilities of build-outs, property taxes, insurance, maintenance, and repairs all fall into the hands of the pharmacy tenant. This releases the landlord from having to cover these costs. Longer lease periods and growing demand for easy access to healthcare services all combine to make pharmacy investments an attractive option. Consider an STNL pharmacy as a solid, predictable long-term investment.