More Vet Clinics and Pet Stores Open Nationally as Private Equity Pours In

“It’s part of the humanization trend in animals,” Rick Neira, Petco’s head of visual merchandising and store design, told a reporter during a tour of a store that’s been called a Gucci Petco. “It’s like giving them services that are on par with human services. It’s a human-grade salon for pets.”

This haven for four-legged friends represents one of the more luxurious manifestations of a growing niche retail sector: pet veterinary offices and upscale retail. Sales and leasing activity in recent years has exploded due to a secular shift toward more pet ownership — the share of U.S. households with pets is nearly double the share of those with kids — and a newfound interest in pets that arose during the pandemic, during which 23 million households adopted dogs or cats. 

The U.S. veterinary market, estimated to be worth more than $11 billion in 2021, is predicted to grow to $23.3 billion by 2030, per Grand View Research. Factor in the increasing numbers of animals, and rising spending on pet well-being and insurance, including a perceived shortage of pet emergency care, and veterinary sites in particular seem primed for a flood of business. There’s even a new wave of startups in the space, like Modern Animal out of Los Angeles, featuring sparkling water for owners and store designs overseen by hip new architecture firms.

That suggests sustained interest in property. Private equity invested more than $45 billion in the sector in the five years to late 2022 as dealmaking volume and real estate value jumped, Zach Goldman, president of Vetley Capital, told PitchBook in September 2022. Veterinary real estate alone generated $507 million in sales in the year that ended in February 2023, per CoStar, with the average vet clinic site trading at $1.5 million. There’s even a litter of real estate firms and REITs focused on these businesses.

In hindsight, the veterinary world was already primed for real estate investment. Traditionally, vets would work out of old homes-turned-offices, a setup long ago seen as inadequate, especially as pandemic-era retail trends — better office design, mobile drop-offs and pickups, and telehealth — became more dominant. Large-scale vet groups have also embarked on expansion sprees and new retail investment. Modern vet offices operate better as free-standing sites, and have niche equipment and HVAC requirements. 

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

Part of the newfound interest in vet real estate came from a flood of private equity money that entered the space beginning in 2017. Investors realized the niche sector was primed to grow, vet groups didn’t want the risk of holding onto real estate, and many facilities required 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 concerns, invested $7.7 billion in vet hospital chain VCA, which had 800-plus locations at the time. In 2019, JAB Holdings Company, a German private equity firm, purchased Compassion-First Pet Hospitals for $1.2 billion, as well as a majority stake in National Veterinary Associates for an undisclosed price. Roughly 60 corporate groups are now buying and consolidating vet practices.

“Those private equity companies do not like to own the real estate as a general rule,” said Tripp Stewart, a former veterinarian and CEO of Hound Property, which started in 2019 and now owns roughly 50 vet offices. “It’s not the best return on their money. They also started to realize that these leases are unique — they’re double-net leases, not triple-net — and offices go out of business more than people think. So there’s a risk factor, and those who understand the business can identify the good buys.”

Standalone vet clinics, which run between 4,000 and 7,000 square feet, and emergency clinics,  which can be as large as 40,000 square feet or more, tend to be great retail tenants, with sticky customer loyalty from high-income consumers. 

Pet-associated real estate offers stability and strength for investors, said Andy Evans, vice president and associate director of health care for Matthews Real Estate Investment Services. Vets don’t move much, since buildouts costs are high, and established practices have loyal customers. Young vets seeking to start a practice tend to gravitate toward cheaper, built-out sites to save on capital investment. Many retailers can live and die by drop-in foot traffic, but pet owners drive to the clinic they know and trust, and don’t typically switch vets on a whim. 

“It’s recession-proof, e-commerce growth-proof — just a stable investment to own,” said Evans. “There’s also not a lot of them out there.”

Last August, Terravet, a longtime player in the sector that owns roughly 200 locations covering 1.5 million square feet, launched a REIT focused on the vet industry. Dan Eisenstadt, Terravet founder and CEO, said that adaptive reuse can work for a vet property, but he’s more focused on quality properties with parking and street visibility. He’s also bullish on emergency care.

“The growth in specialty emergency pet medicine has, from the revenue side, been double-digit growth annually,” Eisenstadt told Commercial Observer. “General practice veterinarians have grown in the solid, high single digits for years.”

But Adams cautions new investors to do their homework: The niche sector, filled with well-capitalized, established players, is hard to enter. 

Pet retail sales more than doubled from $51 billion in 2011 to $123 billion in 2021, per the American Pet Products Association (APPA). Meanwhile, the real estate footprint has grown slowly and steadily behind the demographic trends. Pet Supermarket now boasts 140 stores in its home state of Florida, having bolstered its bottom line by expanding to meet new arrivals. In 2014, it had only 150 stores nationwide compared to 226 today. High-end Woof Gang Bakery and Grooming opened 25 locations nationwide last year by catering to upscale clientele (and their owners). The giants in the industry, Petco and PetSmart, have hovered around 1,500 locations each for the last few years, a big chunk of the nearly 13,000 pet stores nationwide.

The industry hasn’t been without its troubles. In retail, Independent Pet Partners, which had operated 164 stores under four different brands, filed for bankruptcy protection in February 2023. Dozens of the stores were quickly picked up by buyers that included Pet Supplies Plus and Earthwise Pets.

The vet market has also seen the private equity buying spree that began six years ago start to dry up in recent quarters. Larger vet companies consolidated and went on a buying spree in recent years, said Evans. By sweeping up a few small vet practices and consolidating them in one office, private equity firms have a few built-out sites to sell, which could provide opportunities for investors. But, in addition to rising cap rates and interest rates, the largest issue faced by vets remains the lack of labor. 

There’s a significant vet shortage across the nation, a gap that will reach 15,000 by 2030, making expansion very challenging and hindering new practices and real estate deals. The large vet groups that spent on new practices suddenly realized in 2022 that they were running short on staff and pulled back, said Evans. 

The “gold rush days” of vet real estate from two years ago have slowed, he added, but the real estate values, which have dropped 10 to 20 percent from recent highs, still generally hold up. Operators are still doing incredibly well and have stayed busy, unlike office tenants, whose office space may have seen values fall by half during and since the pandemic. 

Analysts and investors in the sector counter suggestions of a slowdown or bubble with the argument this is real estate with significant long-term potential. Think of it as demographics as destiny, they say: Dog owners alone will drive growth for the next decade. Since 2010, the nation has added roughly 23 million new dog-owning households, a number forecast to continue to rise in the coming years.