More veterinary clinics and pet stores are opening nationwide as private equity floods in – Commercial Observer

A Two-story flagship store opens in Manhattan’s Union Square seemed designed to generate lots of real estate titles. And this particular store — a 25,000-square-foot vision of a brand’s future — offered plenty of glitzy designs and high-end amenities: a salon designed to look like a classic hair salon, beauty care offerings health and well-being, and of course an outdoor space. kitchen run by a vendor who prepares custom dog food.

PetcoThe opening of the largest store ever this summer, in the former Tammany Hall building just off New York’s Union Square, may seem like a stretch until you consider the number of American consumers who plan to pamper their pets. The American Pet Products Association predicts that pet owners will buy $144 billion worth of squeeze toys, kibble, pet massages and other assorted treats this year, another record spending following the craze of $136.8 billion last year.

“It’s part of the trend toward humanizing animals,” said Rick Neira, Petco’s manager of visual merchandising and store design. told a reporter during a visit to a store called Gucci Petco. “It’s like offering them services comparable to human services. It is a human-grade salon for pets.

This haven for four-legged friends represents one of the most luxurious manifestations of a growing niche retail sector: pet veterinary practices and high-end retail. Sales and rental activity has exploded in recent years due to a secular shift toward more pet ownership – the share of U.S. households owning pets is almost double the share of those with children – and a new interest in pets that emerged during the pandemic, during which 23 million households have adopted dogs or cats.

The U.S. veterinary market, estimated at more than $11 billion in 2021, is expected to reach $23.3 billion by 2030. by Grand View Search. Consider the growing number of animals and increased spending on pet welfare and insurance, including a perceived shortage of emergency pet care, and veterinary sites in particular seem ready to welcome a flood of business. There’s even a new wave of startups in the space, like Los Angeles’ Modern Animal, offering sparkling water for homeowners and store designs overseen by hip new architecture firms.

This suggests sustained interest in the property. Private equity invested more than $45 billion in the sector in the five years to the end of 2022, as deal volume and real estate values ​​surged, said Zach Goldman, president of Vetley Capital. Presentation book in September 2022. Veterinary real estate alone generated $507 million in sales in the year ending February 2023, according to CoStar, with the average veterinary clinic location trading at 1, 5 million dollars. There are even a series of real estate companies and REITs focused on these activities.

Looking back, the veterinary world was already ready to invest in real estate. Traditionally, veterinarians worked from before houses-transformed-offices, a setup long considered inadequate, especially as pandemic-era retail trends — better office design, mobile drop-offs and pickups, and telehealth — have become more dominant. Large veterinary groups have also embarked on a wave of expansion and new investment in retail. Modern veterinary offices operate best as independent locations and have niche equipment and HVAC requirements.

“Whether it’s human health care or veterinary health care, there are a lot of similarities, which makes construction very different from your general retail business,” Andy Poticha said.founder and CEO of Mosaic constructionwho worked in the veterinary space.

Part of the new interest in veterinary real estate comes from an influx of private equity funds that entered the sector starting in 2017. Investors realized the niche sector was ripe for growth, with veterinary groups didn’t want to take the risk of retaining the real estate and many facilities needed a significant upgrade to meet modern pet owner expectations.

The Mars family, which owns the candy company as well as a number of pet food companies, invested $7.7 billion in the VCA veterinary hospital chain, which at the time had more than 800 locations. In 2019, Company JAB Holdingsa German private equity company, purchased Compassion-First Pet Hospitals for $1.2 billion, as well as a majority stake in National Veterinary Associates for an undisclosed price. About 60 business groups are now buying and consolidating veterinary practices.

“These private equity firms don’t like to own real estate as a general rule,” said Tripp Stewart, former veterinarian and CEO of Dog ownership, which started in 2019 and now has around fifty veterinary practices. “It’s not the best return on investment. They also began to realize that these leases are unique – they are double net leases, not triple net – and that offices are going bankrupt more than people think. So there is a risk factor, and those who understand the industry can identify good buys.

Freestanding veterinary clinics, which range from 4,000 to 7,000 square feet, and emergency clinics, which can reach 40,000 square feet or more, tend to be excellent retail tenants, with Loyal loyalty from high-income consumers.

Pet-related real estate offers stability and strength to investors, said Andy Evans, vice president and associate director of healthcare for Matthews Real Estate Investment Services. Veterinarians don’t move much because construction costs are high and established practices have loyal customers. Young veterans looking to start a practice tend to look to less expensive, built-out locations to save on capital investments. Many retailers may live and die in foot traffic, but pet owners drive to the clinic they know and trust, and generally don’t change veterinarians on a whim.

“It’s recession-proof and e-commerce growth-proof – just a stable investment to own,” Evans said. “There aren’t many either.”

Last August, Terravet, a longtime industry player with approximately 200 locations spanning 1.5 million square feet, has launched a REIT focused on the veterinary sector. Dan Eisenstadt, founder and CEO of Terravet, said adaptive reuse can work for a veterinary property, but it more focused on quality properties with parking and street visibility. He’s also optimistic about emergency care.

“The growth in pet specialty emergency medicine has, from a revenue perspective, been double-digit annual growth,” Eisenstadt told Commercial Observer. “General practice veterinarians have experienced solid, high single-digit growth for years. »

But Adams advises new investors to do their homework: The niche sector, filled with well-capitalized and established players, is difficult to break into.

Pet retail sales more than doubled from $51 billion in 2011 to $123 billion in 2021, according to the American Pet Products Association (APPA). At the same time, the real estate footprint has grown slowly and steadily, in line with demographic trends. Pet Supermarket now has 140 stores in its home state of Florida after strengthening its bottom line by expanding to accommodate newcomers. In 2014, it had only 150 stores nationwide, compared to 226 today. Woof Gang Upscale Bakery and Grooming opened 25 locations nationwide last year by targeting a high-end clientele (and their owners). Industry giants Petco and PetSmart have each operated about 1,500 locations in recent years, a large portion of the nation’s nearly 13,000 pet stores.

The industry has not been without its problems. In retail, Independent Pet Partners, which operated 164 stores under four different brands, filed for bankruptcy in February 2023. Dozens of stores were quickly taken over by buyers, including Pet Supplies Plus and Earthwise Pets.

The veterinary market has also seen the private equity buying frenzy that began six years ago begin to dry up in recent quarters. The biggest veterinary companies have banded together and gone on a buying spree in recent years, Evans said. By consolidating a few small veterinary practices and consolidating them into one office, private equity firms have a few built sites to sell, which could provide opportunities for investors. But aside from rising cap rates and interest rates, the biggest problem facing veterinarians remains a lack of manpower.

There is a significant shortage of veterinarians across the country, a gap that will reach 15,000 by 2030, which makes expansion very difficult and hinders new practices and real estate transactions. Large veterinary groups that spent on new practices suddenly realized in 2022 that they were understaffed and pulled out, Evans said.

The veterinary real estate “gold rush days” of two years ago have slowed, he added, but property values, which have fallen 10 to 20 percent from peaks recent, generally still resist. Operators are still doing incredibly well and have remained busy, unlike office tenants, whose office values ​​may have seen their value drop by half during and since the pandemic.

Industry analysts and investors counter suggestions of a slowdown or bubble by arguing that it is a property with significant long-term potential. Think of it as demographics as destiny, they say: dog owners will single-handedly drive growth over the next decade. Since 2010, the nation has added approximately 23 million new dog-owning householdsa figure that is expected to continue to increase in the years to come.


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