Will Amazon’s Pharmacy Crush Walgreens and CVS?

Last week I closed escrow on a property in Glendale, Arizona, occupied by Sunrise Preschools.  It was sold to a 1031 exchange buyer who paid all cash for the property.  The cap rate on the sale was 6.59%, which is a great deal in today’s market for a corporate tenant.  The tenant on the lease, Child Care Network, has over 250 locations nationwide, and is the 6th largest operator of day cares in the country.  Congratulations to everyone who was involved with the sale.

I still have one more Sunrise Preschool for sale, this one in Mesa Arizona.  This one is on a hard corner with very low replaceable rent.  We’re asking $3,550,000, which is a 6.5% cap rate.  Contact me if you have any questions or interest.

So, what’s Amazon been up to lately to further crush retail?  Well last week it was the launch of their online pharmacy business. They will be offering two-day delivery of prescriptions to Prime members along with a help line you can call to get questions answered by a pharmacist.  Amazon acquired an online pharmacy called PillPack back in 2018, so they’ve been working on this for years.

So how did the big drug retailers respond to the news?  Walgreens stock was down over 9% on the announcement, CVS was down over 8.5%, and Rite Aid was down 16%.  With more and more people afraid to leave home, especially to go into a drugstore where they might encounter more sick people, this could be a big success for Amazon.  However, Walgreens, CVS, and Rite Aid also do home delivery, so hopefully they’ll be able to hold their own against Amazon.  If you’ve already got your prescription at Walgreens, it might not make sense to move it over to Amazon if you knew that Walgreens could deliver it to your home.

One retail bright spot during the pandemic is Target who plans to expand aggressively with new store openings in 2021.  Last week, Target reported a a third consecutive quarter of double or triple digit growth.  What’s important to note is that how important the  physical retail stores are to their success.  95% of their sales in the third quarter were either in-store purchases, or bought online and fulfilled by the store in some way, either through pickup or local delivery.  Target expects to open between 30-40 small-format stores next year.

The small format stores average about 40,000 square feet, which is about a third the size of a traditional Target.  And some have been as small as 15,000 SF.  So if you’ve got a junior anchor space available for lease, talk to your leasing broker.  Target might be interested.  And if you need a leasing broker, give us a call at Progressive Real Estate Partners – (909) 230-4500.  It’s great to hear a bricks and mortar success story these days.

Chipotle opened a new “digital kitchen” store last week in New York state where you can’t order in the store.   You have to place your order on their web site or through their app.   The store only allows you to pick up your food.  There is a tiny seating area and a place where you can get your drinks.  Much of the real estate in the store will be for shelves to store orders for pickup.  Online sales in the last quarter were triple over what they were last year, and made up over half of the company’s total sales.  So this concept makes sense.

Last year, Chipotle started rolling out drive thru pickup lanes, which they call Chipotlanes, and originally planned to launch a few dozen stores.  But due to the pandemic, they’ve accelerated that model and recently opened up their 100th drive thru location.  These are different from, say a McDonald’s drive thru, since you can’t order at the window.  You need to order your food ahead of time, and the drive thru is just for picking up your food.  But the strategy is in line with the pickup-only store in that Chipotle is directing people to their app to order their food.  Smart move.

What will happen with commercial real estate property values in 2021?  According to Real Capital Analytics, investors should be prepared for more challenges in 2021, even if the pandemic ends next year – and we don’t know if that will actually be the case.  RCA tracks property sales over $2MM and maintains a price index for the different property types.

Their Industrial property pricing index is up 8.5% this year versus last year, apartments have been up 7.2%.  Retail has been down 5.2%, and office properties have been down 1%.

Their data indicates that deal volume for industrial properties is back to pre-pandemic levels, and apartments are getting close.  However, retail and hotel properties are still well below average.

This weekend kicks off Black Friday!  No, wait, this month kicks off Black Friday.  And traditionally, at least in the past few years, the following Monday was considered Cyber Monday.  But in 2020, it’s all become the same – black Friday and Cyber Monday all month long.  Retailers are going to be offering some smoking deals to try to recover from a very challenging year.  The National Retail Federation predicts that holiday sales this year will be up between 3.6% and 5.2% over last year, with clearly a surge in online spending.  So get your computer and your mouse ready for online doorbuster sales.

I’m sure that at least one person’s life will be saved this year – that one person who won’t be getting trampled at Walmart on Friday morning.