Median asking cap rates in the single tenant drug store sector compressed by 20 basis points from the second quarter of 2011 to the second quarter of 2012, according to new research from The Boulder Group's Research Department.
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The Northbrook, Il-based boutique investment real estate service firm specializing in single tenant net lease properties also found that cap rate compression was significantly greater (50 basis points) for Walgreens and CVS properties built in the last two years.
The firm attributed the lower cap rates to a lack of new development coupled with the current low interest rate environment.
The supply of new construction drug stores decreased by 19% in 2012 when compared to 2011. Investor demand for higher quality properties in this asset class outweighs demand for the entire net lease sector, Boulder Group noted.
In the second quarter of this year, drug stores were priced at a 50 basis point premium versus the entire net lease retail market.
That compression may not continue in the future, Boulder Group noted.
Walgreens credit rating was downgraded last month to BBB from A- by Standard & Poor's. This downgrade was a result of Walgreens increasing their debt levels in the $6.7 billion acquisition of Alliance Boots, a U.K. based pharmacy chain.
The long-standing effect on Walgreens cap rates from this downgrade will be determined by lender's future underwriting of Walgreens properties, Boulder noted.
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