For wealthy individuals who own properties occupied by Walgreens, CVS and Rite Aid, a broker who specializes in the niche has a warning: Don’t get stuck with an empty drugstore and no replacement tenant. 

The three largest U.S. drugstore chains are closing thousands of locations nationwide as consumer preferences and shopping habits change. Walgreens Boots Alliance delivered the latest news, saying last week that it’s reviewing whether to close about 2,150 underperforming U.S. locations.

Individual investors are one of the largest groups of owners of drugstore buildings, along with real estate investment trusts, family offices and the drugstores themselves, Arthur Griffith, founder and managing broker of San Francisco-based brokerage Rx Syndicate, told CoStar News. Drugstores have been attractive to individuals because they generate steady income and require little direct involvement by the landlord, he said.

If the pharmacy moves out, suddenly the investment becomes less attractive, said Griffith, who represents buyers and sellers of those properties.

“If you got into this for the passive income and to be a passive owner, you don’t want to find yourself having to be a developer” if a drugstore moves out, Griffith said. “It’s not in the core competencies of these investors to redevelop a corner drugstore site."

Fortunately for drugstore property owners, there are plenty of buyers and many businesses willing to lease the buildings, though finding a new tenant will probably require spending money on a building renovation. And that new tenant might be paying lower rent than Walgreens, CVS or Rite Aid, according to brokers who work in the sector.

Some wealthy individuals are deciding to exit their drugstore investments. In a majority of the 24 largest U.S. deals for drugstore locations by sales price over the past three months, the seller was an individual owner, according to CoStar data. In the largest deal, Wesco Properties paid nearly $12.3 million, or about $917 per square foot, for a Walgreens at 550 N. Ventu Park Road in Newbury Park, California. The second-largest deal had a buyer listed as Xia Lin acquiring a Walgreens at 2605 Middlefield Road in Palo Alto, California, for $10.7 million, or about $718 per square foot, the data shows.

However, the average sales price for drugstores on a nationwide basis has declined as Walgreens, CVS and Rite Aid close hundreds of stores, depressing values, said Brandon Svec, national director of U.S. retail analytics at CoStar Group.

“A pharmacy sale averaged $300 to $350 per square foot in mid-2022,” Svec said. “Now the average pharmacy sells for $235 a square foot.”

Drugstores that were used by national chains are nevertheless relatively easy to sell compared to other retail properties, said Daniel Taub, national director of the retail and net lease divisions at Marcus & Millichap. They often occupy high-profile sites, increasing their value.

“One of the good things about Walgreens and CVS is that they usually have good corner locations at traffic signals, with good visibility and good access,” Taub told CoStar News.

In addition, many U.S. markets have a lack of available properties for retail tenants like drugstores, Taub said. That’s largely because there has been so little new construction of retail properties over the past several years.

“If you were to ever get back space [from Walgreens, CVS or Rite Aid closing a store], now is probably the best time because of the lack of supply and strong demand from consumers,” making it easier to find potential buyers, Taub said.

Some institutional owners are also cutting their exposure to drugstore real estate. Realty Income, a San Diego-based real estate investment trust, will sell some drugstores in its portfolio this year, CEO Sumit Roy said during a conference call in May. Roy did not specify how many drugstores it will sell or their locations. Realty Income owns about 365 drugstores, according to Taub, who represents the REIT as both a buyer and a seller.

Finding a new tenant for a property vacated by a drugstore may require more work and cost than an individual is willing to spend, Taub said. And the payoff could be a tenant who pays far less in rent than a drugstore.

“Walgreens tends to pay big, above-market rents,” Taub said.

But there are plenty of retailers and healthcare companies that would be interested in moving into a former drugstore, mostly because it’s a quick and cheaper way to open a location, Phil Woodyatt, senior partner at design firm WD Partners, told CoStar News.

“It’s likely less expensive to take over an existing space and make it your own versus building from the ground-up,” said Woodyatt, a former in-house architect for CVS.

Drugstores have already solved the problem of traffic in terms of ingress and egress, so a new tenant would not need to obtain the sometimes costly and time-consuming permits for road access, WD Partners Executive Vice President Dan Stanek told CoStar News.

Most drugstores occupy “plain vanilla” buildings that are usually rectangular and have little in the way of complex internal features. It’s easy to reconfigure the interiors of those spaces for tenants like dollar stores, thrift stores and medical clinics.

“There really isn’t anything specific about drugstore locations that are challenging,” Stanek said. “In fact, they are great for conversions.”

Former drugstores across the country have been occupied by tenants in other sectors. In Columbus, Ohio, the thrift store chain Volunteers of America Ohio recently renovated a former Walgreens at 3583 E. Broad St. into a new location. Dollar Tree moved into a former Walgreens at 2814 Curry Ford Road in Orlando, Florida. Caledonia Food Co-op bought and converted a former Rite Aid at 502 Railroad St. in St. Johnsbury, Vermont. A former Rite Aid at 402 Clairton Blvd. in Pittsburgh is now a Clean Express Auto Wash.

Even so, it’s not cheap to retrofit a former drugstore for a new tenant, said Svec with CoStar.

“You’ve got to take down the signage, improve the parking lot, maintain the shrubbery and do the kinds of investments needed to beautify the property,” Svec said.

Drugstore property investors may have one final option, Mark Reeder, executive vice president and principal at SRS Real Estate Partners, told CoStar News. If Walgreens, CVS and Rite Aid have several years remaining on their existing leases and the terms require they continue to pay taxes, insurance and maintenance even if they move out, owners may decide to simply hang on to the buildings.

“There’s still a healthy amount of income remaining on those leases,” Reeder said.