Kevin May Director, GRS Group (310) @kmay_grs

Kevin May
Director, GRS Group
(310) 614-9329

In the world of retail real estate, drug stores are a pretty solid bet. An aging population, mixed with an increased amount of goods provided by these businesses makes them a necessity for most people. A consumer can even obtain basic grocery goods at a pharmacy, which would have been unheard of several years ago.

So why did the proposed Walgreens acquisition of Rite Aid fail?

There was regulatory scrutiny over Walgreens Boots Alliance purchasing its competitor for just over $9.4 billion back in 2015. This led to Walgreens only buying about 2,100 stores for slightly less than $5.2 billion, which is essentially half of Rite Aid’s portfolio of locations. What makes this more complicated is that Ralphs, another pharmacy owner, was supposed to be sold a portion of the Rite Aid portfolio, and that transaction is no longer taking place.

It’s no secret that Rite Aid has had financial issues. Same-store sales dropped three percent during the company’s fourth quarter. It also lost $21.1 million in its Q4. To most observers, this is an obvious operating problem. In contrast, Walgreens experienced a same-store increase, year over year, that jumped 2.1 percent, but granted, it operates more than 8,000 locations.

Net-lease operators of commercial real estate likely have nothing to worry about. Investing in a drugstore or quick-service restaurant is going to be a safe purchase. Consumers are going to shop at these locations as a part of their daily lives, and they will always see a consistent business flow.

One investor we can trust is Warren Buffett. His hedge-fund firm Berkshire Hathaway just spent $377 million on Store Capital Corp., a REIT that specializes in these assets, representing a 9.8-percent share of the company. Berkshire’s purchase can likely make people who put money into commercial real estate feel more than safe.

If there are store closures as a result of any transaction, it should not hurt retail real estate investors at all. Plenty of tenants are lining up for these locations, which are coveted for their great pad sites and end-cap placement. The drugstore sector of retail is not evaporating soon.