CRE Investors Brace For Impact As Walgreens Plans 1,200 Store Closures

Walgreens Boots Alliance‘s recent announcement to close 1,200 stores over the next three years, including 500 in 2025, has sent its stock plummeting to $10.45, less than half its value at the start of the year. This reflects broader struggles in the drugstore industry, where CVS has lost 28% of its value and laid off 3,000 workers, and Rite-Aid emerged from bankruptcy after slashing $2 billion in debt.

The impact isn’t just on investors. Commercial real estate (CRE) markets are also concerned, particularly regarding leased properties. Walgreens, with an estimated 8,700 U.S. stores, is closing 14% of them. CVS is closing 900 stores, and Rite-Aid 500. Factors such as competition from online and discount retailers, and the influence of pharmacy benefit managers, are pressuring profits.

While Walgreens’ real estate is generally considered high-quality, the scale of closures raises questions.

“What if lenders don’t want to refinance?” warned Jonathan Hipp of Avison Young, noting that property sales could become harder as cap rates rise and lender perceptions shift. Walgreens CEO also highlighted that 75% of its profits come from just 25% of its locations, suggesting more closures could follow.

A Trepp analysis revealed that Walgreens is a tenant in properties backing $3.69 billion in commercial mortgage-backed securities (CMBS), a major concern for CRE investors, lenders, and CMBS bondholders. Retail CMBS delinquency rates have risen, with Walgreens at 5.46%, CVS at 4.35%, and Rite-Aid at 11.82%.

These store closures are likely to have significant ripple effects across both the retail and real estate sectors in the coming years.

 

Source:  GlobeSt.