Thursday, April 19, 2012

Why Buy a NNN Drug Store commercial investment?

So this may sound a little like a rant and it very well may be!

Let me start with the statement that NNN investments are great commercial investment properties for the right individuals at the right time.  Many buyers want the best location, best quality - read corporate guarantee, longest remaining lease term, highest cap rate, newest building, etc for their NNN investment property purchase.  The cream of the crop in this list of "must haves" tends to be the drug stores (CVS, Walgreens, Eckert). Almost all of these - especially the new construction ones - have 25 year leases, corporate signatures, and cap rates that are better than most mom & pop strip centers or the typical Burger King NNN deal.
So, what is wrong with that???

The 25 year lease tends to be flat for 25 years.  No increases in rent.  Price paid for an investment property tends to be the Net Operating Income divided by the prevailing cap rate.  NNN assets increase in value as the NOI does with rent increases or with new tenants paying market rents.  In a flat lease example: at time of purchase - $3,000,000 purchase price, NOI of $210,000 per year, 7% cap rate. 10 years later, that asset still has $210,000 of NOI at a prevailing cap rate of 7%, then the value is still $3,000,000.  20 years later, same value because of same NOI - $3,000,000.  The $210,000 per year income is wonderful, yet the value of the property has stayed flat.  If you bought any other traditional real estate investment - such as a single family home or an apartment building, the assumption is appreciation over 10 years or 20 years.

Also, consider that the buying power of $210,000 today is far greater than what it will be in 20 years.  Do you remember what $1,000 felt like 20 years ago?  It barely lasts one day in Las Vegas these days - sorry for the personal reference!

Stability! - One reason why drug store investments have been so much in demand is their extremely low rate of default.  Many drug stores are sold based on the number of prescriptions held by the store - 1,500 is OK, 1,800 is good, over 2,000 is excellent. These patients that return to the store every month will buy additional items as they make their way to the exit.

And then there is Technology... "Curiosity killed the cat" should be translated to "Technology killed the retail investment".  I just drove past a billboard touting a new app for ordering prescription drugs from your iPhone. If FedEx will deliver your prescriptions to your mailbox with the click of a  mouse, then what will happen to those tempting bags of chips displayed on the drug stores shelves? I will let you connect the dots.

And don't get me started on land lease drug store NNNs!

Let's talk about why I like local, multi-tenant strip centers occupied by bakeries, nail salons, sandwich shops, dry cleaners and convenience stores. These un-corporate signature deals have stability, upside and are protected from technology killers. As said many times before, as healthy as our county gets, we will always want to buy a burger - said burger cannot be FedExed - yet!

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