With Retail Pharmacies Under The Weather, CRE Grapples For The Right Prescription

After 68 years serving the West Texas city of San Angelo, the independent drugstore Medical Arts Pharmacy filled its last prescriptions and said goodbye to customers for the final time on Jan. 31.

Owner Bryan Abernathy is angry — and looking for a new job, likely outside the field he has worked in for almost two decades.

“I've already been told, since I've closed my store, by three other people that I know that run independent [pharmacies], that they're going to be right behind us if something doesn't change,” Abernathy said.

Closure is a fairly common story among independent drugstores these days. The National Community Pharmacists Association reports that more than one U.S. independent pharmacy closed per day, about 450, during the 12 months leading to June 2024. 

But it’s also an increasingly common outcome among large pharmacy chains throughout Texas and the nation, leaving hundreds of stores vacant. That's opening up new opportunities for creative repurposing, but many landlords are forced to accept lower rents than those paid by their former drugstore occupants.

“Tenants like Skechers and many others that have backfilled spaces are almost never going to pay you as much rent as the drugstores were paying,” said Jason Baker, who leads the tenant representation team at Houston firm Baker Katz. “That creates a real challenge for the owner of the property.”

Of the nearly 89,000 retail pharmacies that were open between 2010 and 2020, nearly 30% had already closed by 2021, according to a study from health policy journal Health Affairs published in December.

The closures have only accelerated in the years since, led by the market’s top two chains, CVS and Walgreens, which have seen a rapid decline in store numbers. 

After expanding aggressively following the turn of the century in an effort to be within five miles of 80% of the U.S. population, both chains saw their national store numbers drop by 8% or more from fiscal years 2019 to 2024, according to data from analytics company RetailStat.

And more pain is on the way.

In October, Walgreens announced plans to shutter 1,200 stores over the next three years as it looks to dig out of a financial hole. CVS closed 900 locations between 2022 and 2024, and the company announced it would pursue “further footprint optimization in 2025” on an earnings call last week. Some news outlets have reported that CVS will close 270 more stores in 2025.

Meanwhile, since filing for bankruptcy in 2023, Rite Aid has closed more than 800 stores. 

'They've Got To Figure It Out Quickly'

With retail space in scarce supply, it has not been difficult to entice new tenants to small spaces like Medical Arts Pharmacy's, which was about 3K SF, and more typical chain drugstores, which average out at just under 15K SF and are usually located on prime corners. National retail vacancy sits at a near-historic low of 4.1%.

But while the spaces don’t usually sit empty for long, retail brokers said not every owner is likely to attract the same quality tenant.

“If a landlord's left with an empty building, they're going to want some stability in that and they're going to seek someone that can offer a credible lease with a long term,” Younger Partners Senior Vice President Michael Ytem said. 

And that isn't necessarily easy to come by.

Dollar Tree has snapped up 300 previous Walgreens locations, according to a February JLL report which lists health clinics, veterinary practices, pet stores, pickleball venues and niche grocers as potential tenants for the spaces.

CVS owns the buildings that house many of its stores and can afford to wait for a quality tenant. But there is also a large chunk of stores that are privately owned.

Younger Partners associate Luke Nolan said the chain will typically close a privately owned store before a corporate-owned one, but what becomes of the vacant space once a store is closed differs depending on who holds the deed.

“Some folks can afford to wait it out for the next best thing, and some folks, they're operating month-to-month,” Ytem said. “They can't afford to hold a dark shell for 30 days, so they’ve got to figure it out quickly.”

Ytem and Nolan brokered a deal last year to turn a privately held former CVS in Dallas into a car wash.

That property nearly became a daycare center and was enticing to many different entrepreneurs. Still, the size of most retail pharmacies is too small to redevelop into anything besides other retail uses, Ytem said.

“To try to reimagine a site for townhomes [and] you're in an uphill battle. It's not organic to rewrite the script on that,” Ytem said.

Successful repurposings like the car wash don’t work in every instance due to the differing demographics and traffic counts of where CVS and Walgreens stores are located. 

“As much as we'd like to, pun intended, rinse and repeat with a car wash, some circumstances just don't make sense,” Ytem said.

'You Just Can't Keep The Doors Open'

CVS is the national leader for pharmacy market share with nearly 26%, followed by Walgreens at almost 15%. But alternative pharmacy options like mail-order and online sales are cutting into its consumer base, according to Colliers' fourth-quarter healthcare services report. 

That could spell more closures ahead as retail pharmacies face other challenges like inflation and staffing, per the report.

Another huge factor is the control pharmacy benefit managers have over pricing and network participation. Pharmacy benefit managers are the health insurance company middlemen that negotiate prescription drug discounts for their parent companies.

They leave many pharmacies with limited leverage and the threat of customers being steered to other chains.

And those contracts are cutting prescription reimbursement rates for pharmacies of all sizes as the drugstore market faces a shrinking customer base amid new competition, Abernathy said.

Abernathy vied for business with two other independent pharmacies in San Angelo as well as corporate options like Walgreens, CVS and major grocers, but the competition was manageable and volume wasn’t a problem, he said. 

“I could do every prescription in San Angelo, which is a town of 100,000 people,” Abernathy said. “But when you're losing $3 just on the cost of the medication, you just can't keep the doors open.”

The bigger of the two leading pharmacy chains isn't as affected by pharmacy benefit managers’ contracts since it owns pharmacy benefit manager CVS Caremark.

That’s why Abernathy thinks CVS could be the last chain standing as online alternatives grow and supermarket chains, which can operate their pharmacy section as a loss leader, eat up most of the remaining market share.

That could be a plus for some retail real estate. Grocery stores have an opportunity to grow their market shares due to the convenience factor, Colliers National Office Research Director Marianne Skorupski said.

“I can do something else while I'm also getting my prescriptions and I can talk to a pharmacist,” Skorupski said. “This is a win in anybody's book.”

While Abernathy expects the pool of pharmacies, especially independent ones, to continue draining, others are more optimistic. After watching the drugstore expansion battle in the early 21st century from the front row, Baker believes there is a future for the existing major chain drugstores.

“One of these two players is going to survive, and it might be that they both survive, but they [will] look like very different companies than they are today,” Baker said. “They're going to have to learn how to fit into a much different-sized space and offer something altogether different.”