Why Pharmacy Properties Remain Strong Net Lease Investments

09/09/2024

Industry Insights

Pharmacy-anchored properties have long been a beacon of stability in the net lease real estate market, offering investors passive income with minimal management. In particular, drugstore sites leased to CVS and Walgreens stand out for their resilience. These single-tenant assets are typically structured as triple-net (NNN) leases – meaning the tenant handles taxes, insurance, and maintenance – which delivers steady, long-term cash flow to landlords with virtually zero day-to-day responsibilities . It’s no wonder that pharmacies have emerged as a distinct niche in NNN investing, prized for their reliable income streams and essential services to the community .

Net Lease Fundamentals: Passive Income with Stability

At the core of a CVS or Walgreens investment is the net lease itself. What is a triple-net lease and why do investors favor it for passive income? In a NNN lease, the tenant assumes nearly all property expenses (from property taxes to roof repairs), leaving the owner with a rent check as virtually the only duty . This structure turns real estate ownership into a bond-like income stream – the landlord enjoys consistent rent without operating headaches. According to Investopedia, triple-net properties are a popular vehicle for investors seeking steady income with relatively low risk ( Investopedia ). Lease terms for pharmacy chains are long (often 15–25 years initial term) with multiple renewal options, locking in occupancy for decades . Many CVS and Walgreens leases are absolute NNN, meaning the tenant even covers structural components, truly maximizing the “hands-off” nature of the investment . For investors – particularly those planning for retirement or looking to park capital in a stable asset – this arrangement provides peace of mind and predictability. The trade-off for such safety is usually a slightly lower cap rate (yield), but the security and ease of ownership make it well worth it for many.

Why are net lease assets considered ideal for passive investors?

The appeal of net lease properties lies in their predictable cash flow and minimal management. Unlike multi-tenant buildings or apartments, a single-tenant NNN property doesn’t burden the owner with maintenance calls or expense volatility – the tenant handles those obligations. This is especially true with high-credit tenants. In practice, owning a CVS or Walgreens under a long-term NNN lease means collecting rent much like a coupon on a bond, with the tenant’s corporate promise backing the payments ( Investopedia ). Additionally, net lease agreements often include provisions like periodic rent escalations or multiple extension options, aligning with investors’ long-range financial planning. The result is an investment vehicle that generates passive income reliably, allowing owners to focus on portfolio strategy rather than property management.

Investment-Grade Tenants: The Strength of CVS and Walgreens

Another key factor in the enduring popularity of pharmacy-anchored real estate is the strength of the tenants themselves. Are CVS and Walgreens good net lease tenants? In short, yes – both companies boast investment-grade credit ratings (around BBB by S&P) ( Lee-Associates ) and are among the largest pharmacy operators in the nation. This creditworthiness provides a high degree of confidence that rent obligations will be met consistently over the lease term. Moreover, virtually all Walgreens and CVS leases are backed by the corporations’ guarantees (these are not franchise stores, but corporate-operated locations), meaning the full assets of multi-billion-dollar companies stand behind each rent check ( Signnn ). Even during turbulent times, these pharmacy giants have the financial resilience to continue honoring leases – a fact proven during the COVID-19 pandemic when both chains kept stores open as “essential businesses” and continued paying rent uninterrupted ( Lee-Associates ).

Beyond credit ratings, the lease structures offered by these tenants are highly landlord-friendly. Walgreens, for instance, is known for signing 20- to 25-year initial terms (often with no termination rights), providing stable occupancy for two+ decades ( Signnn ). CVS similarly commits to long terms and often utilizes absolute NNN leases. While some older legacy leases lack annual rent bumps (meaning rental income can be flat over the primary term)( Lee-Associates ), the trade-off is the certainty of a fixed rent from a blue-chip tenant. Investors often deem this a reasonable concession for the security of knowing their tenant is a nationwide healthcare retailer with billions in revenue. In cases where newer leases are in place, modest rent increases (for example, 5–10% every five years) might be built in, adding a hedge against inflation – but even where flat rent exists, the credit quality and longevity of CVS and Walgreens tenancies usually outweigh concerns about inflationary erosion.

How secure are pharmacy tenants like CVS and Walgreens?

In evaluating any net lease investment, a common question is just how secure the tenant is – after all, the tenant’s ability to pay is the linchpin of the asset’s performance. With CVS and Walgreens, investors take comfort in the tenants’ deep financial resources and dominant market positions. Both companies generate tens of billions in annual revenue and have diversified business models (pharmacy services, retail convenience items, health clinics, and in CVS’s case, even insurance through Aetna). Their investment-grade status signals a low default probability, and historically, neither company has ever reneged on a net lease obligation. Furthermore, most pharmacy leases are corporate-guaranteed, so even if a particular store’s sales underperform, the parent company remains on the hook for rent. This was evident when Walgreens acquired a tranche of Rite Aid stores – some overlapping locations were closed, yet Walgreens often continued paying rent on the dark stores or reassigned the leases, rather than defaulting. In the unlikely worst-case scenario of a Walgreens or CVS bankruptcy (something analysts consider remote), leaseholders would be creditors to a massive firm with substantial assets. In sum, few tenant types offer the degree of security that CVS and Walgreens do, making them linchpins of many net lease portfolios.

Adapting to Change: Store Closures and Healthcare Pivot

Recent headlines might give some investors pause: both CVS and Walgreens have announced strategic store closures in certain markets. This naturally leads to the question, why are CVS and Walgreens closing stores, and should net lease investors be worried? The closures are largely a response to shifts in consumer behavior and over-expansion in years past. Both chains grew aggressively in the 2000s, often planting stores on opposite corners of “Main & Main” intersections across America. Over time, this led to some locations cannibalizing each other’s sales and a footprint that in certain areas exceeded today’s demand. For example, by 2021 CVS had over 9,900 stores and decided to trim about 9% of them – announcing plans to shut roughly 900 locations over three years ( Fastcompany ). This pivot was part of a broader strategy to evolve the remaining stores into healthcare hubs rather than just retail pharmacies Fastcompany . Walgreens, facing similar dynamics, recently revealed that approximately a quarter of its stores were underperforming, prompting a plan to shutter 1,200 locations (about 14% of its U.S. footprint) by 2027 (N ). Importantly, these closures are concentrated in saturated markets or where leases were naturally expiring, and they allow the companies to reallocate resources to higher-performing sites.

The upside for investors is that the core real estate fundamentals remain intact. CVS and Walgreens are not abandoning the pharmacy business – far from it. They are refining it. Many closing stores will be those in trade areas that can be served by nearby sister locations, or stores with outdated formats that don’t justify renewal. Meanwhile, both brands are doubling down on a healthcare-centric model in their prime stores. CVS is converting hundreds of locations into its new “HealthHUB” format, dedicating more floor space to medical clinics, diagnostic services, and wellness offerings ( Fastcompany ). Walgreens has invested in primary care provider partnerships (like VillageMD clinics within stores) and is testing smaller-format pharmacies in urban areas focused on prescriptions and convenience essentials ( Lee-associates ) . For net lease landlords, these initiatives signal the tenants’ commitment to long-term viability: a store that adds clinics and ups its healthcare game is likely to remain relevant and profitable, supporting its rent payments. In short, the industry’s evolution – from simply dispensing pills and candy bars to providing frontline healthcare – is a positive for property owners, as it enhances the resilience of the tenant’s business model.

What happens to the real estate if a pharmacy closes?

A common concern is the fate of a property if the tenant decides to close the store. Fortunately for landlords, the standard pharmacy lease terms offer protection. First, both CVS and Walgreens leases typically prevent the tenant from simply walking away – if they go “dark” (cease operations) before lease expiration, they often must continue paying rent unless they negotiate a buyout. In many cases where a Walgreens or CVS has closed a location for strategic reasons, they kept paying rent for the remainder of the term or subleased the space to another retailer . This means investors still receive income even if the store is shuttered. Second, the locations themselves are often highly re-tenantable. These pharmacies usually sit on prime corners with high traffic counts, good visibility, parking, and drive-thru infrastructure – attributes that other retailers covet. If a store becomes vacant at lease end, owners have seen replacement tenants like dollar stores, fast food restaurants, grocers, or even other medical users line up to backfill the space . In some cases, the building might be torn down and the site redeveloped, but either way the underlying land value and commercial appeal help preserve the investment’s value. In essence, while a closed store is not ideal, the combination of continued rent liability and strong real estate fundamentals mitigates much of the risk.

Prime Locations and Cap Rate Performance

The mantra of real estate – “location, location, location” – certainly applies to pharmacy net leases. CVS and Walgreens have spent decades securing corner parcels at high-traffic intersections, often in dense retail corridors or hard-to-enter neighborhoods. These prime locations are a big reason their properties hold value. A typical setup: a freestanding store on a signalized corner (“hard corner”) with easy ingress/egress, ample parking, and sometimes a drive-thru lane for the pharmacy. Such sites are inherently attractive, not just to the drugstore itself but to a variety of retailers. For investors, this translates into real estate that underpins the lease value – even if the tenant ever leaves, the property is located where demand for commercial space remains robust. As one industry saying goes, Walgreens and CVS stores are often found on the “100% corner” of town, meaning the best retail corner available ( Signnn ). This prime positioning gives investors confidence in long-term residual value.

How have pharmacy net lease cap rates been performing? Historically, drugstore-anchored net leases have traded at cap rates slightly below the broader single-tenant retail average, reflecting their lower risk profile. In fact, over the past several years the pharmacy sector’s cap rates were about 20 basis points lower than the STNL (single-tenant net lease) norm. Pre-pandemic (around 2017), demand for Walgreens and CVS properties was so intense that cap rates hit aggressive lows (mid-5% range for top locations) . After 2018, cap rates drifted up a bit to more typical levels as the initial frenzy cooled . Then 2020 brought a resurgence of interest – with pharmacies deemed “essential” and remaining open during COVID lockdowns, investors poured capital into this safe haven asset class . This flight to quality caused cap rate compression once again, meaning prices rose. Even in today’s environment (late 2024 into 2025), pharmacy property yields remain attractive relative to risk. Recent market data shows prime CVS and Walgreens deals (those with long lease terms and strong locations) trading in the mid-5% to low-6% cap rate range. If the lease is shorter or the tenant credit is perceived as weaker (for example, a lesser-known regional pharmacy or a store with only a few years left), buyers demand a higher cap rate – often 7%–8% or more . By contrast, absolute top-tier deals in coveted coastal markets at the height of the market even dipped below 5% cap rates when interest rates were very low . Overall, the cap rate performance of pharmacy assets has been strong, thanks to investor confidence in the tenants and the real estate. Even as interest rates and economic conditions fluctuate, the enduring demand from 1031 exchange buyers, private investors, and some institutions has kept pricing for quality pharmacy net leases relatively firm.

It’s also worth noting that the aging population and healthcare demand provide a tailwind for these properties’ performance. The U.S. population is steadily aging, with some 10,000 baby boomers reaching retirement age each day. This drives prescription volumes and store traffic. U.S. pharmacies dispensed approximately 6.7 billion prescriptions in 2022 (up from 6.1 billion in 2018) ( Brevitas )– a reflection of growing medication needs. By 2030, about 73 million Americans will be 65 or older . These demographics suggest that well-located pharmacies will continue to see consistent foot traffic for years to come. In turn, investors and appraisers often view occupied pharmacy sites as having strong ongoing utility, which supports valuations. Simply put, the essential nature of pharmacies in communities – exemplified during the pandemic – underpins demand for the properties themselves. This helps cap rates for CVS and Walgreens remain competitive, as many buyers are willing to accept slightly lower yields given the high certainty of continued tenant performance and residual site value.

Risk Factors and Mitigation Strategies

No investment is without risk, and savvy investors examine potential downsides even for blue-chip net leases. In the case of pharmacy properties, one risk factor often discussed is market saturation. As noted, CVS and Walgreens expanded rapidly, and in some areas there are simply more drugstores than needed. This is partly what drove the recent closure announcements – essentially a trimming of excess. While it’s concerning to hear of store closures, it’s also a sign that the companies are proactively addressing saturation risk by consolidating to the best-performing locations. From an investor’s perspective, owning one of the “last store standing” in a given trade area is actually a stronger position, as it faces less local competition going forward. Another risk is the rise of online pharmacies and mail-order prescription services (including Amazon’s push into pharmacy). If more consumers get their medications delivered, foot traffic to physical drugstores could diminish over time. However, so far the impact has been gradual – many customers continue to prefer the convenience of a nearby pharmacy, especially for urgent needs or health services like vaccinations. CVS and Walgreens have also invested heavily in online ordering and express pickup options to compete on that front, leveraging their physical footprint for last-mile delivery advantages.

Investors should also be mindful of lease-specific risks. For example, older leases with no rent increases can lead to diminishing real returns if inflation is significant . A flat $250,000/year rent in year 1 will effectively be worth less in year 15 after inflation. Some investors mitigate this by refinancing or by expecting appreciation in the property’s land value to compensate. Additionally, the credit health of the tenant should be monitored. While CVS and Walgreens are strong, the third major chain, Rite Aid, demonstrated how problems can arise – Rite Aid’s weaker financials (and a 2023 bankruptcy filing) turned many of its stores into higher-risk propositions . By sticking with the market leaders and ensuring any acquisition has a corporate guarantee (not just a local franchisee as tenant), investors can largely sidestep that issue. Lastly, there is re-leasing or exit risk: if you buy a pharmacy with, say, 5 years left on the base term, you face the uncertainty of whether the tenant will renew or if you’ll need to find a new occupant. That risk is typically priced in (the cap rate will be higher for a short lease), and it can be mitigated by due diligence – e.g. assessing store sales (if available), local competition, and the strategic value of that location to the tenant. Many landlords are comforted by the fact that even if Walgreens or CVS doesn’t renew, the aforementioned prime location should attract new tenants. In fact, some investors acquire short-term lease drugstores intentionally, aiming to re-lease or redevelop at higher rents once the below-market legacy lease rolls off.

How can investors mitigate risks in pharmacy net lease investments?

Mitigating risk comes down to prudent asset selection and lease structuring. First, focus on quality locations and strong guarantees. A pharmacy on a visible corner with solid demographics, backed by a corporate lease, is about as defensive an investment as one can find in retail real estate. Such a property will be more “Amazon-proof” – its convenience and service offerings are hard to fully replicate online – and it will retain its value better in downturns. Second, pay attention to lease duration. If your goal is long-term passive income, consider properties with 10+ years remaining on the term (or options that are likely to be exercised). If you do opt for a shorter lease for a higher yield, have a game plan for repositioning or re-leasing the asset, and try to ascertain the tenant’s renewal intentions. Third, diversify across your portfolio. Even within net lease holdings, one might own different industries (pharmacy, convenience store, quick-service restaurant, etc.) across various regions. CVS and Walgreens properties often serve as a core, low-volatility anchor in such a portfolio, balancing out higher-risk investments. Finally, engage in active dialogue with brokers or property managers who specialize in net lease pharmacies – they can provide insights on tenant credit updates, local market conditions, and any early indicators of a store’s performance that might signal future changes.

Portfolio Strategy: 1031 Exchanges and Diversification

Pharmacy net lease properties frequently play a strategic role in portfolio planning, especially for those looking to transition from active management or to leverage tax advantages. Are CVS and Walgreens properties good options for a 1031 exchange? Absolutely – and in practice they are among the most sought-after 1031 exchange targets. When an investor sells another property and aims to defer capital gains via a ( 1031 tax-deferred exchange ), the clock is ticking (typically 45 days to identify replacement properties and 180 days to close). Net lease drugstores are popular because they offer turnkey simplicity: an exchange buyer can acquire a high-quality, income-producing asset without taking on new management burdens or unpredictable repairs. In fact, in recent years private 1031 buyers have been the most active purchasers of Walgreens and CVS stores, often willing to pay a premium cap rate to meet their exchange deadlines and park their proceeds securely ( Lee-associates ). The wide range of price points – from older rural Walgreens that might sell around $2 million, to large urban or newly built CVS stores that can fetch $5–$10+ million – means that exchange investors of various equity sizes can find a suitable pharmacy asset. This flexibility, combined with the credit strength of the tenants, makes pharmacy NNN deals a natural fit for trade buyers trying to satisfy the IRS’s requirements in a short timeframe.

Beyond 1031 exchanges, diversification is another reason seasoned investors hold pharmacy assets. These properties tend to have a different risk profile than, say, multi-tenant shopping centers or office buildings. Their stability and essential-service nature can provide a ballast in an investment portfolio. For high-net-worth individuals or family offices, owning a few CVS/Walgreens stores can deliver bond-like income that helps balance more growth-oriented or management-intensive assets (such as development projects or apartment complexes). For institutional investors and REITs, pharmacy leases offer a defensive allocation – a way to earn solid returns even during economic hiccups. During the early 2020 pandemic lockdowns, for example, many retail properties saw rent interruptions or tenant failures, but pharmacies largely continued paying and operating, highlighting their recession-resistant qualities. This reliability through cycles is precisely what diversification is meant to achieve. By spreading investments across asset classes and tenant types, investors can reduce the impact of any single sector’s downturn. Pharmacies, with their broad customer base and healthcare underpinning, have historically been a segment that holds up well when other sectors struggle – making them a wise component of a diversified real estate portfolio.

Conclusion: Resilient Assets in a Changing Market

In the final analysis, pharmacy properties remain strong net lease investments because they hit an investor’s sweet spot: essential, low-touch, and backed by creditworthy tenants adapting to the future. The net lease fundamentals provide passive income that is hard to match without taking on more risk or hassle. The tenants – CVS and Walgreens – bring not only financial strength but also a proactive approach to evolving their business models, which ultimately protects landlords. Even amid e-commerce pressures and periodic rightsizing of store networks, these companies continue to serve as cornerstones of communities, ensuring that well-located pharmacy real estate retains its desirability and value. For investors navigating the cross-currents of today’s economy, a long-term lease with a Walgreens or CVS can offer a welcome island of stability. As part of a balanced portfolio or as a 1031 exchange solution, pharmacy net leases deliver consistent returns and peace of mind. While diligence is always required – understanding the specific lease, store performance, and market trends – the overarching story is clear: in a world of evolving retail, the local pharmacy remains a solid bet for those seeking dependable, lasting income.