A Closer Look Into The Drugstore Investment Market

GlobeSt.com chats with Tom Fritz, a senior director at Stan Johnson Co., about how buyers are becoming more cognizant of market rents and are typically cautious about acquiring properties that are above market.

For all things happening in the drugstore investment market, GlobeSt.com caught up with Tom Fritz, a senior director at Stan Johnson Co., who noted that, among other things, buyers are becoming more cognizant of market rents and are typically cautious about acquiring properties that are above market.

GlobeSt.com: What advice are you giving your clients about the drugstore investment market? 

Tom Fritz: Cap rates are up 25 to 50 basis points in the past 90 days, depending on the specific tenant. We’re in the middle of seeing the pendulum swing from a seller-favorable market to buyer-favorable. When advising sellers, we help them get out in front of a falling market so they aren’t playing catch-up later on.

GlobeSt.com: What noteworthy trends are you seeing across the single-tenant drugstore sector today? 

Fritz: As lease terms drop below 12 years, it’s all about rent compared to market. Buyers are becoming more and more cognizant of market rents and are typically cautious about acquiring properties that are above market. For drugstores, however, above-market rents are the norm. Tenants, too, are now becoming more aware of this, so many are asking for rent reductions of 30 to 50 percent at renewal time. This can be challenging for both the tenant and the landlord, though. Tenants may not want to go through the hassle of relocating a store if a landlord says no, while the landlord doesn’t want to go through a backfill scenario if the tenant chooses to leave.

GlobeSt.com: So, do you call the tenant’s bluff, or not?

Fritz: It completely depends on the individual situation. If the tenant can’t afford to give up the real estate because a competitor is next door, or because store sales are strong and the tenant lacks the incentive to relocate, the landlord can retain above-market rents and a sustained property value by calling the bluff. If store sales are too low and a relocation—or even a net closure—is a better outcome for the tenant, the landlord risks having a vacant building for at least six months, accompanied by a decline in property value of 25% to 50% based on new rents. In that situation, a 30% to 40% rent reduction may make sense.

Published in GlobeSt