Grocery Anchored: The Top Requested Retail Class

By Dennis Kaiser

The retail sector is experiencing tremendous change, yet within the chaos one property type is emerging as a ‘must-have’ asset. Connect Media wanted to find out why grocery-anchored retail has become the most requested retail class. We questioned two retail investment experts, HFF’s Bryan Ley and Gleb Lvovich, to gain insights into the factors driving this trend in our latest 3 CRE Q&A.

Q: Has demand and pricing softened for grocery-anchored shopping centers, with all of the negative headlines surrounding retail?

A: We continue to see strong demand and pricing for best of class grocery-anchored shopping centers. At the same time, pricing is lumpy for properties without a story or positive momentum. It’s very hard to generalize and pricing is affected by a number of factors, which is why the role of an intermediary with real-time market knowledge is so important today. Grocery-anchored centers are the preferred, safer investment in retail right now, as it’s viewed as daily needs-oriented. Investors are targeting the Top 3 grocers in the respective area and/or the potential to bring a better grocer option, like a specialty grocer, as a value creation opportunity.

Q: What is driving the strong demand for grocery-anchored retail?

A: In general, grocery-anchored community centers have performed well historically and continue to do so today. If you look at recent earning reports from publically-traded shopping center REIT’s, those with a heavy concentration of grocery-anchored retail in their portfolios have maintained occupancy at or above 95%. They’ve also reported positive leasing spreads quarter after quarter, which shows how effectively these properties have generated rent growth. Demand is strong because performance has been strong. Demand is strong due to the sales productivity. In grocery today, there are fewer true credit tenants, and thus the sales productivity is so important to gauge the success, and long term viability of the grocer at the center.

Q: How has Amazon’s acquisition of Whole Foods impacted the grocery-anchored retail space?

A: Amazon made a powerful statement about the need for bricks and mortar retail with their acquisition of Whole Foods. At the same time, they have made Whole Foods more competitive on price and are using data and technology to their benefit. Traditional grocery stores are now investing heavily in technology, leveraging click-and-collect and have the benefit of strong real estate in infill locations. The same rules still apply, the best sites command top tier tenants and rents, including Amazon/Whole Foods.

Amazon’s acquisition solidified the growth risks that some investor’s had with Whole Foods in 2016/2017. In addition, the buy made the Whole Foods credit profile that much stronger as the bond rating for Amazon is so much stronger than what Whole Foods was, thus making the combined grocer, a better overall credit-rated tenant. Amazon is in the business of making companies more efficient and driving new customers to it. We have already seen the changes at Whole Foods with lower costs in the store for commodities like fruits, vegetables, water and milk, which lures new customers and more customers into Whole Foods, which then captures even more sales, as you now have the customer in the store and stocking up on other, higher-margin items too.

For comments, questions or concerns, please contact Dennis Kaiser