- Drugstores have long been viewed as stable and prominent tenants in US shopping centers.
- As major pharmacy chains announce store closures, thousands of storefronts are emptying out.
- The spaces can sit vacant, though landlords are incentivized to fill the "junior box" locations.
America's retail pharmacy giants are undergoing an uncomfortable period of decline, with their convenience in question.
For years, landlords viewed drugstores as stable tenants in shopping centers since shoppers relied on them for prescriptions.
That made them attractive fits for prominent storefronts, including as an anchor tenant for small shopping centers, said Steven Teitelbaum, a professorial lecturer at American University's Kogod School of Business who previously practiced commercial real estate law at Jones Day.
Known in the industry as a "junior box" — as opposed to a big box store, like Walmart or Target — these 20,000 square-foot formats were often purpose-built to support pharmacies' dual business of dispensing medication in the back and snacks in the front.
Many are now expected to close — thousands over the next several years across CVS, Walgreens, and Rite Aid. Walgreens CEO Tim Wentworth said last summer that the retail pharmacy industry was "largely overbuilt for where the future was going to be."
The pullback raises the question: What happens to the leftover spaces?
Walgreens told BI the company works with community stakeholders to minimize the disruption to customers when a store is set to close.
"When we do close a store that has a lease term remaining, we explore several options, including buyouts, subleases, and renegotiating the rate. Maintaining the lease without occupancy is our option of last resort," the spokesperson said. "More often than not, we successfully find a new tenant which is beneficial to our business, consumers, and the community."
In cases where leases of closing stores dictate that drugstores have to keep paying rent, some landlords may opt to leave the spaces empty, especially in downtowns and other dense urban environments, Teitelbaum told BI. In other cases, such as when a drugstore closes in a suburban shopping center, the loss of a drugstore can mean a drop in shoppers visiting the area, he added.
"They tend to have good locations on corners and as the anchor tenants in small shopping centers, so when they close, it's an obvious, in-your-face phenomenon," Teitelbaum said.
That can impact other businesses in the shopping center, which often rely on anchor tenants like drugstores and supermarkets to draw people in, he added. The loss of foot traffic can have a negative ripple effect on the landlord, even if rent payments for the closed store continue.
It's not always obvious what could slot into the leftover space — but companies see opportunities in the locations.
Walgreens' CEO also said on the company's third-quarter earnings call that Walgreens locations are "widely acknowledged to be on the best corners in America."
"We believe there's the opportunity to not simply carry the lease as a dark store," he said. "There's gold in them hills, as they say."
US retail vacancy rates are at historic lows of around 4%, according to data from property management giant Colliers, and asking rents are nudging higher as prospective tenants compete for space.
"When you have a junior box, that is like gold to a landlord," Anjee Solanki, Colliers' head of retail services, told BI.
Solanki said she sees a broad range of post-pharmacy uses for the format, from sporting goods and furniture to apparel and beauty. Some landlords are subdividing larger units to offer space to a mix of smaller businesses.
"There's just so many amazing concepts out there," she said.
Some of the real estate investment trusts, or REITs, that are landlords for the drugstore chains see other potential uses for the spaces.
"They're good spots for urgent cares," John Albright, CEO of Alpine Income Property Trust, a REIT that counts Walgreens as a tenant, said on an earnings call in July. Other possible tenants include fast-casual restaurants, dollar stores, and schools, Albright said.
Teitelbaum told BI that no single type of tenant is likely to take up most of the empty storefronts. Many potential retail tenants, such as grocery stores, need more parking and other accommodations for their high foot traffic relative to pharmacies. Others, such as restaurants, would require kitchens and other expensive renovations.
"They have ranges of sizes and formats, and you can't just say, 'Well, we'll just convert them all to pickleball courts or urgent care,'" he said.
A CVS spokesperson said 95% of the company's closing locations are leased, while 5% are owned.
"We make every effort to market available properties and find new tenants as soon as possible. In most instances, we sublease to other tenants to ensure the property is utilized and contributing to the community," the CVS spokesperson said.
A Rite Aid spokesperson said that the company routinely evaluates its store network and is "committed to becoming financially and operationally healthy."
Compared to many of the store closings last decade, many of the closures are occurring in a more orderly fashion and coming onto the property market at a pace that allows them to be absorbed in a reasonable period of time.
In addition, Colliers' Solanki said the gauntlet of the pandemic has forged a stronger relationship between retailers and landlords to work together.
Where a normal lease renewal conversation might have occurred within a year of the contract's expiration, those agreements are being reached with 24 to 30 months of lead time, giving the parties involved time to plan, she added.
Solanki also said half of retail real estate deals tracked by Colliers last quarter were on the market for less than three months. It indicates that while retail pharmacies have been criticized for failing to offer something new and exciting for US shoppers, their future replacements are willing to bet they can use the locations to do just that.
"That 50% is a strong number," Solanki said.