{"id":1004130360,"date":"2015-10-29T05:51:12","date_gmt":"2015-10-29T13:51:12","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004130360"},"modified":"2022-12-08T14:19:52","modified_gmt":"2022-12-08T22:19:52","slug":"fallout-from-walgreens-rite-aid-deal-could-be-substantial","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/fallout-from-walgreens-rite-aid-deal-could-be-substantial\/","title":{"rendered":"Fallout from Walgreens\u2013Rite Aid Deal Could Be Substantial"},"content":{"rendered":"

By Scott Baltic, Contributing Editor<\/em><\/p>\n

Following Tuesday\u2019s announcement by Walgreens Boots Alliance that it had agreed to buy Rite Aid for about $9 billion, numerous observers have been pondering the likely consequences of the deal \u2014 assuming it passes antitrust approval \u2014 on the real estate side.<\/p>\n

Rite Aid has nearly 4,600 stores in 31 states and the District of Columbia, according to a prepared statement. And Walgreens currently has 8,173 stores in the United States, in all 50 states, plus the District of Columbia, Puerto Rico and the U.S. Virgin Islands, a Walgreens spokesperson told Commercial Property Executive<\/em>, adding that about 85 percent of all U.S. Walgreens stores are leased.<\/p>\n

Divestment and Dispositions\u00a0 <\/strong><\/p>\n

Those numbers are plenty big enough to draw major regulatory scrutiny, of course, so this is high on the list of issues around the acquisition.<\/p>\n

The deal \u201cobviously whittles the drug store field effectively down to a two-horse race in the U.S.,\u201d Garrick Brown,VP of research for the West Region at Cushman & Wakefield, told CPE<\/em>.<\/p>\n

\u201cThe new Walgreens certainly wouldn\u2019t be a monopoly, thanks to CVS and the presence of grocery pharmacy and independents, but I find it doubtful they get through this process without having to divest themselves of some pharmacies,\u201d Brown said. How they might do that, he added, is a highly uncertain at this point.<\/p>\n

Britton Costa, a director in the U.S. REITs group at Fitch Ratings, zeroed in on a few specific regions: \u201cThere are about 13 states, primarily California and the East Coast, where there is overlap [between the two chains\u2019 stores] that could raise antitrust concerns.\u201d<\/p>\n

Depending on how many stores might have to be divested before regulatory approval, said Brown, \u201cI don\u2019t think it is unrealistic to expect \u2026 as many as 3,000 locations ultimately being viewed as redundant. [W]hether those would be spun off, sold off (there are not a lot of potential buyers left) or what remains a question mark.\u201d<\/p>\n

In many cases, Brown suspects, redundancies would be closed as leases expire, though because so many drug store leases are longer-term deals that process might not move quickly enough. He anticipates that where stores of each chain compete directly with one another, the sales per square foot will generally favor Walgreens.<\/p>\n

Differences in Stores <\/strong><\/p>\n

However, Brown points out, Walgreens has much smaller stores on average, mostly in the 15,000- to 20,000-square-foot range, while the last time Rite Aid was in growth mode, close to a decade ago, he said, \u201cthey were going with a larger footprint that could often top 40,000 square feet.\u201d<\/p>\n

\u201cThe new, smaller footprint is what is favored,\u201d Brown said, \u201cand it is what Walgreens merchandises for,\u201d leading him to conclude that most closures \u201cwill likely fall on the Rite Aid side of things,\u201d though the timeline is not clear.<\/p>\n

\"Joanne<\/a>

Joanne Podell, Cushman & Wakefield<\/p><\/div>\n

And it isn\u2019t only size where the stores differ, say two more experts. Walgreens\u2019 store presentations (like those of arch-rival CVS) are consistently quite good, said Joanne Podell, vice chairman at Cushman & Wakefield, while her sense is that Rite Aid stores often look tired.<\/p>\n

The cost of upgrading large numbers of stores would be \u201cextraordinary,\u201d she said, and Rite Aid might lack the commitment (even more than the capital) to tackle those upgrades.<\/p>\n

Rite Aid funded its recent acquisitions with a heavy debt load, noted Michael Lagazo, a senior advisor\/retail with the Asset Advisory Group at Sperry Van Ness in San Diego. \u201cRite Aid has not made comparable post-recession investments in [its] \u2026 stores, as competitors like CVS and Walgreens have. The cost of deferred maintenance may adversely affect available operating capital.\u201d<\/p>\n

The Impact on Landlords<\/strong><\/p>\n

\"Michael<\/a>

Michael Lagazo, SVN<\/p><\/div>\n

Naturally, said Lagazo, \u201cthe impact on landlords will be the consolidation of overlapping stores\u2026. As the new occupant, Walgreens acquires the right to exercise option periods on existing leases. Single-tenant, free-standing triple-net projects will likely be most impacted by this.\u201d<\/p>\n

A potential upside for landlords, he said, would be that if a given location\u2019s lease is not renewed, \u201cthe space may then be leased at market or above market rent, improving the value of the project.\u201d<\/p>\n

As to the downside for the real estate market, Brown takes a stab at quantifying the possible upheaval. Figure around 3,000 redundancies, falling heavily on the Rite Aid side, with their larger store sizes, so an average store size of 25,000 square feet. \u201cIf as many as 3,000 closures eventually happened (and this could be over an extended timeline of well over five years),\u201d he concluded, \u201cwe could be talking about 75 million square feet of space eventually being returned to the market.\u201d<\/p>\n

For winning landlords, though, there would be one advantage, said Costa: \u201cWe expect the combined company will be a stronger credit tenant than Rite Aid Corp. was.\u201d<\/p>\n

The larger Walgreens, Costa expects, \u201cwill honor its leases while looking to gain regulatory approval by either divesting of certain stores or letting them go dark while continuing to pay rent.\u201d<\/p>\n

The divestiture approach was used in the Safeway-Albertsons merger earlier this year, he commented, \u201cand the impact on the landlord is ultimately determined by who the new tenant is. Conversely, the go-dark approach is often a strategic decision to limit competitors from gaining market share.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

Following Tuesday\u2019s announcement by Walgreens that it had agreed to buy Rite Aid for about $9 billion, CPE examined the likely consequences of the deal on the real estate side.<\/p>\n","protected":false},"author":882,"featured_media":1004130366,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21754,23891,21742],"tags":[],"class_list":["post-1004130360","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-medical-office","category-national","category-latest"],"acf":[],"yoast_head":"\nFallout from Walgreens\u2013Rite Aid Deal Could Be Substantial - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/fallout-from-walgreens-rite-aid-deal-could-be-substantial\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Fallout from Walgreens\u2013Rite Aid Deal Could Be Substantial\" \/>\n<meta property=\"og:description\" content=\"Following Tuesday\u2019s announcement by Walgreens that it had agreed to buy Rite Aid for about $9 billion, CPE examined the likely consequences of the deal on the real estate side.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/fallout-from-walgreens-rite-aid-deal-could-be-substantial\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2015-10-29T13:51:12+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-12-08T22:19:52+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/10\/JoannePodell.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"2049\" \/>\n\t<meta property=\"og:image:height\" content=\"3300\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Scott Baltic\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/fallout-from-walgreens-rite-aid-deal-could-be-substantial\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/fallout-from-walgreens-rite-aid-deal-could-be-substantial\/\",\"name\":\"Fallout from Walgreens\u2013Rite Aid Deal Could Be Substantial - 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He earned a master\u2019s in journalism from Northwestern University\u2019s Medill School of Journalism and has a bachelor\u2019s from North Park University.\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/author\/scott-baltic\/\"}]}<\/script>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"Fallout from Walgreens\u2013Rite Aid Deal Could Be Substantial - Commercial Property Executive","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.commercialsearch.com\/news\/fallout-from-walgreens-rite-aid-deal-could-be-substantial\/","og_locale":"en_US","og_type":"article","og_title":"Fallout from Walgreens\u2013Rite Aid Deal Could Be Substantial","og_description":"Following Tuesday\u2019s announcement by Walgreens that it had agreed to buy Rite Aid for about $9 billion, CPE examined the likely consequences of the deal on the real estate side.","og_url":"https:\/\/www.commercialsearch.com\/news\/fallout-from-walgreens-rite-aid-deal-could-be-substantial\/","og_site_name":"Commercial Property Executive","article_publisher":"https:\/\/www.facebook.com\/CPExecutive","article_published_time":"2015-10-29T13:51:12+00:00","article_modified_time":"2022-12-08T22:19:52+00:00","og_image":[{"width":2049,"height":3300,"url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/10\/JoannePodell.jpg","type":"image\/jpeg"}],"author":"Scott Baltic","twitter_card":"summary_large_image","twitter_creator":"@cpexecutive","twitter_site":"@cpexecutive","schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.commercialsearch.com\/news\/fallout-from-walgreens-rite-aid-deal-could-be-substantial\/","url":"https:\/\/www.commercialsearch.com\/news\/fallout-from-walgreens-rite-aid-deal-could-be-substantial\/","name":"Fallout from Walgreens\u2013Rite Aid Deal Could Be Substantial - 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