In one of my college real estate classes, the professor needed an example of the safest commercial property you could own. He picked Walgreens. Great tenant, great credit, and always on the best corner in town. If you owned the building, Walgreens paid the rent for twenty-five years and you didn't have to think about it much.
About twenty years later, I drive around St. Louis and see empty Walgreens on a lot of those great corners. The signs are down, the drive-through lane is chained off, and weeds are coming up through the parking lot.
So what happened to the safest investment in the textbook? It was safe. Everyone knew it was safe. And eventually so many people piled in that it stopped being a good investment.
That pattern shows up all over investing, and it's worth understanding.
How Safe Gets Expensive
Real estate investors measure price with something called a cap rate. The simple version is this: for every $100 you pay for a building, how many dollars of rent do you get back each year? A 7% cap rate means $7 of rent per $100. A lower cap rate means you are paying more for the same rent.
In 2006 and 2007, a Walgreens selling at a 6% cap rate was considered a record. Investors were happy to accept $6 a year for every $100 because the tenant felt bulletproof.
Then the price kept climbing. In 2014, a new Walgreens in Chicago sold at a cap rate under 5%, another record. By 2021, buyers were routinely paying 4.5% to 5%. People in the industry called Walgreens the gold standard.
Here is the part that gets missed. Most of these leases had flat rent, with no increases for twenty years or more. A buyer at a 5% cap rate was locking in a fixed paycheck at a low rate for decades and betting everything on one tenant staying healthy. And with no rent increases, inflation quietly shrank what every one of those payments was worth. The risk never went away. Buyers just stopped getting paid for it.
There Were More of Them, Too
The crowding wasn't only on the investor side. Walgreens itself kept building. The company went from about 3,000 stores in 2000 to more than 7,500 a decade later. Developers raced to tie up corners, knock down old gas stations, and put up new stores, because there was always a buyer waiting at a low cap rate.
Eventually a lot of those stores were competing with each other. At the same time, the business got harder. Prescription reimbursements got squeezed, and online shopping took a bite out of the front of the store. In 2024 the company said roughly a quarter of its stores were losing money and announced plans to close 1,200 of them.
Today, the typical Walgreens is listed at around a 7.5% cap rate. If you bought at 5% and the lease is still fully intact, your building is worth roughly a third less than you paid. If the store closed and the lease ran out, you probably still own a good corner. But the next tenant is likely a dollar store or a clinic paying a lot less rent.
The investors who did best were the early ones. The developer who built the store and sold it did well. The buyer in the 1990s or early 2000s at a higher cap rate got paid for the risk. The buyer at the top got the reputation without the return.
It's Not Just Drugstores
The same thing happened with hedge funds, and that story has nothing to do with real estate.
In the 1990s, hedge funds were a small corner of the investing world. A relatively small group of managers found trades that worked, and they made a lot of money doing it. The industry had about $39 billion in 1990. By the end of 2007 it had $2.3 trillion.
That money came from pension funds, endowments, and wealthy families who had watched the early results and wanted in. The problem is that there are only so many mispriced stocks, bonds, and currencies at any given time. When thousands of smart people with trillions of dollars are chasing the same handful of trades, the opportunities get competed away.
The returns tell the story. The extra return hedge funds earned above the market was large in the 1990s and has been roughly zero over the last decade, while the fees stayed high. Warren Buffett made this famous in 2008 when he bet that a simple S&P 500 index fund would beat a group of hedge funds picked by a professional over ten years. It wasn't close. Nine years in, the index fund was up about 7% a year and the hedge funds about 2%.
I saw this from my own seat. Ten or fifteen years ago, meeting with hedge fund managers was a routine part of my work. Today it's rare.
Hedge funds didn't stop being run by smart people. There were just too many smart people doing the same thing.
You can see the same forces in traditional buyout private equity today. There are far more firms than there were twenty years ago, prices for companies are much higher, and deals have to work a lot harder to hit the same returns. How that plays out is still being written.
What Everyone Knows
None of this means Walgreens was a bad idea or that hedge funds are a scam. Both worked, and worked well, for a long time. But the success itself changed things. More buyers meant higher prices. More stores meant more competition between them. More hedge funds meant fewer good trades to go around. The Walgreens people were buying in 2021 was not the same investment my professor described, even though it had the same name on the sign.
I'm not immune to this either. We bought several houses in 2020 and 2021, when a lot of people were buying and low rates made some deals look very attractive. Some of them were good opportunities. But I sometimes wonder how they'll play out over time, because the conditions that made them work were unusual, and a lot of people were acting on them at the same time.
That is the trap with an investment everyone agrees on. The track record is real, but it was earned under conditions that may not exist anymore. So when you look at something that has worked for years, don't just ask whether it worked. Ask why it worked, and whether those reasons are still true.
The track record tells you what worked. Your job is to figure out what changed.