This Former Walgreens Drugstore Is Being Repurposed For Five New Tenants

Will more drugstore-to-multi tenant conversions be likely in the future?

Over 1,000 drugstores have been vacated in the past twelve months.

And nearly 2,000 closed in the prior five years.

With so much vacant drugstore real estate available, these buildings have been a common source for reuse and redevelopment.

But while hundreds of former drugstores have been repurposed for individual tenants like dollar stores and health clinics, few have been adapted for multi-tenant use.

Why?

Well carving up a single tenant drugstore building for multiple users can result in odd suite sizes, a significant amount of unleasable space, and a lack of parking.

Plus the price to acquire and the cost to repurpose can be quite expensive.

But one developer group has a plan to convert a former Walgreens in the Rochester, New York area into a five tenant strip center for Panera Bread, Chipotle and others.

Do the proposed building layout, parking area — and most importantly the deal economics — work for this project?

And could it lead to more drugstore-to-multi tenant conversions in the future?

One challenge in converting a single tenant drugstore into a multi tenant use is to divide the building into “leasable” suites.

For instance, dividing what was a single tenant building into multiple suites can create spaces that are too narrow and deep to attract tenants.

Conversely, a multi-tenant layout with standard suite dimensions can result in a significant amount of “dead” space — or unleasable building area that is a drag on project economics.

The developers of the former Walgreens attempted to solve for this issue by facing four tenants west and one tenant south which provides adequate frontage without excessive suite depth.

This layout also minimizes dead space — as ~95% of the building’s square footage remains rentable with the remaining space utilized as a mechanical room.

The plan also smartly provides for two drive-up access points:

A reconfiguration of the existing drive-thru on the north side of the building for a proposed Panera Bread restaurant and the addition of a Chipotlane pick up window on the building’s east wall for Chipotle.

The lack of adequate parking is another issue in drugstore conversions.

Most drugstore customers have short stays or utilize the drive-thru — so few drugstore sites include large parking fields.

But the replacement of one tenant with five — plus the addition of parking intensive uses like restaurants — can result in site congestion and violate city ordinances.

In fact while the 67 parking spaces at this former Walgreens site were sufficient for its use as a drugstore, local ordinances require 9 extra spaces for the proposed multi-tenant use with two restaurants.

However, instead of adding parking at the site, the developers obtained a variance from the City’s Planning Board.

They cited the increased customer usage of mobile apps, drive thru lanes and pickup windows over the past several years has reduced parking demand.

Of course building layouts and parking do not matter if deal economics do not work.

But in this case it appears the developers may have a viable plan.

While the costs to acquire and convert this former Walgreens are not known, the property had been on the market at a ~$3.2 MM list price.

It is likely that the expense to demise the building for multiple users — through the addition of new walls, bathrooms, entrances, windows and signage — plus the costs to complete leases for five tenants is probably in the range of $2.5 - $3 MM.

At ~14,000 square feet of leasable space in the multi-tenant configuration, that would result in an all-in cost in the range of $400 - $450 per square foot.

For the developers to earn a market return at this cost level, tenant rent would need to average over $35 per square foot plus triple net expense reimbursements — likely an achievable metric in the Rochester, New York market.

It appears that this development group has a plan that both solves the key functional issues of single tenant-to-multi user conversions and pencils out as a viable project.

So does that mean will we see more repurposes of drugstore buildings as multi-tenant strip centers in the future?

Probably not.

The thousands of former drugstore buildings on the market comprise a wide range of building sizes, site dimensions and locations.

Many of these buildings will not layout as well as this proposed Walgreens conversion — or be in areas with significant demand from multiple users.

Additionally, parking is still likely to be an issue for other potential tenants, sites and municipalities.

But the biggest reason why there will be relatively few drugstore-to-multi tenant conversions is deal economics — particularly given the increased risks associated with this type of conversion.

Even if the acquisition price and proposed renovation cost appear to work, execution risk and complexity are much higher with a multi-tenant reuse.

For instance, five different leases need to be negotiated and five separate spaces built out — all on a compressed timeline.

If even one of the five leases fails to materialize, if the lease-up period takes too long or if any of the buildouts are too costly there may be no developer profit.

Consider the case of a former Rite Aid in Cahaba Heights, Alabama that closed in 2018 and was redeveloped the following year for a multi-tenant use.

A restaurant tenant was found to take the north end of the building (and the drive-thru) and a health care user signed a lease for the south endcap.

But the middle space was not leased when the project commenced as the developers planned to find a user during the buildout period.

Nearly five years later, the health clinic in the south endcap already vacated (though a replacement tenant appears to be found) and the the middle suite remains unleased.

The other point to consider is that in many parts of the country the cost to acquire land is a relatively small percentage of overall project costs.

So the ‘all-in’ estimated cost of $400 - $450 per square foot for the multi-tenant conversion of the former Walgreens in Rochester may be more costly than new construction in many — if not most — markets in the country.

Given the sheer number of former drugstore buildings that are available, there will likely be other multi-tenant conversions.

But these will be more likely in infill “land scarce” areas that are among the most expensive areas to build and that have few available greenfield development sites.

So for most owners and developers of vacant drugstore buildings, re-tenanting with a single user will likely continue to be the simplest and most lucrative path.