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Grocery-Anchored Retail Lures More Investors Coming Out of COVID

Its enduring appeal might actually be driving prices for shopping centers tied to supermarkets to unsustainable levels. Who cares? 

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The search for retail reliability — complicated by the oft-noted COVID-era acceleration of shifts in shopping habits — has turned from a focus on high-end shopping centers to something much more pedestrian: the neighborhood
grocery store. 

Since the pandemic, grocery-anchored retail developments have joined darling asset classes such as industrial, life sciences and multifamily as a target of investors. They’re drawn to an investment that, in a time of sparsely populated downtowns, seems to be able to reliably get shoppers to walk through the door, week after week. 

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“It’s a clear winner coming out of the pandemic, from the retail perspective,” said Mark Bratt, CEO of Westwood Financial, which has a significant national investment in grocery-anchored retail with more than 124 in its portfolio. 

The retail roller coaster ride of the last few years saw sentiment on these shopping centers flip. Grocery-anchored retail centers were initially dismissed because of early pandemic assumptions that e-commerce would vastly expand its grocery share, but recent shifts in consumer patterns and the challenges of running profitable delivery services have shown weekly trips to the supermarket to be a durable consumer habit. With unease over return-to-work numbers softening downtown retail, these mostly suburban sites are primed to grow in value as a suburban retrenchment and the growth of hot Sun Belt markets continues. 

Like all retail segments, transactions around grocery-anchored sites have been weighed down by the current economy. But despite a drop in activity — sales volume per month, averaging $1.5 billion in the first half of 2022, dipped to an average of $852 million a month for the rocky second part of the year, according to brokerage JLL (JLL) — total transactions still notched a new annual record of $14.7 billion. Investment in grocery-anchored retail is still the “most popular place” to invest in retail, said James Cook, Americas director of retail research at JLL. 

“There are very few real estate sectors right now where you can buy with positive leverage,” said Ron Dickerman, president and founder of Madison International Realty, the New York-based firm that found its investments in grocery center assets emerge as a bright spot during the pandemic. “It’s kind of the holy grail for real estate investors: They want to invest at a higher cap rate than the cost of borrowing. And this is one of those sectors that would allow you to do that.”

Traffic to Westwood’s grocery stores is increasing, not decreasing, said Bratt. Some of the company’s larger centers have clocked 6 million visits a year, and new investments in more grab-and-go food options and delivery pickup have only generated more foot traffic and return shoppers. 

“It’s turned out that nobody can do grocery delivery efficiently and cost-effectively,” said Cook. A string of shuttered delivery apps such as Jokr and Buyk, and retrenchment in the industry, back up his point. “Until there’s some new big technological revolution that I’m not aware of, these stores continue to be the best investment in retail.”

Recent shifts in tenants occupying the satellite retail spaces around the big-name grocer also spell more profit potential for owners. Businesses like dry cleaners — hurt by more working from home and less formal wear — are being replaced by tenants with a greater focus on fitness and health, from yoga studios, bike stores and Planet Fitness franchises to nail and hair salons. Cook said there’s more dining and fast-casual dining becoming tenants in the complexes that grocery stores anchor. That brings in additional foot traffic and spending. 

The biggest change has been the at-home worker, whose visits between meetings have led to a rise in midday and midweek visits to grocery stores, said Ethan Chernofsky, senior vice president of Placer.ai, a proptech firm that measures foot traffic. His data actually shows a 4.3 percent decrease in foot traffic to grocery stores during the first quarter of 2023. But, the addition of more of these leisurely, longer trips often means more time spent in the store and therefore more purchases, which contributes to better operational performance by grocers and other daily-needs retailers.  

Investors continue to see these properties as good buys, despite current financial and banking challenges. Private capital has played an increasingly larger role as financing has become more difficult to secure. DRA Advisors spent $870 million acquiring a 33-asset grocery portfolio from Cedar Realty Trust last summer.

As Bratt said, despite the national glut of retail space, there’s been very few new grocery-anchored centers that have come online in the last decade, making those in expanding markets like Phoenix, Dallas, Atlanta or Raleigh, N.C., exceptionally good from a growth perspective. He’s called it one of the best buying markets he’s seen in years. 

Madison International’s Dickerman calls it “a new equilibrium.” 

“Zero new supply has been developed, rents have fallen, cap rates have risen,” he said. “There are some people who see the narrative in this kind of retail as one of an undiscovered asset class. I think retail represents a surprising, stable, safe haven for investment capital.” 

Owners and new buyers of these sites can also upgrade facilities relatively cheaply. A few million dollars spent on landscaping, facade improvements and carving out space in the parking lot for picking up online orders can bring aging centers up to par. That’s a much more appealing capital spend than the types of expensive upgrades needed for, say, more sophisticated urban retail or indoor malls. 

Strategies on acquiring a portfolio vary, said Dickerman. Buyers may seek out only the top grocers in a market, or look for more expensive urban retail. Others focus simply on sales per square foot and occupancy costs, or seek out stores with longer leases, or simply have favorite anchor tenants. 

While marquee brands like Whole Foods still drive up value, a number of discount and regional chains have been expanding and showing great value as an anchor. The German-owned discount chain Aldi opened 87 new stores last year in the U.S., Texas regional favorite H-E-B added a dozen new locations and 1.2 million square feet, and Florida-focused Publix continues to march up the East Coast, adding 25 stores last year. 

This year alone, there’s been a few larger buys, including Newmark’s sale of the Vallarta Supermarkets-anchored Victory Plaza site in North Hollywood, Calif., for $57 million in February. As JLL research suggests, even as these deals become more difficult to finance, “grocery centers will continue to be the favored retail asset class for most investor types.” Most grocery-anchored centers trade at a slightly lower cap rate than power centers (large outdoor malls with multiple big-box retailers) because they’re perceived as being more stable. 

“If anything, there’s a lot of investor appetite, and people are coming to the conclusion that they’re overpriced,” said Adam Ducker, CEO of real estate consultancy RCLCO. “The pricing has been pushed up to a level that’s not sustainable.”

The pandemic solidified the strategy of investing in grocery-anchored retail as a specific class, said Brandon Donnelly, managing director of development at Toronto-based Slate Asset Management, which has a REIT that invests only in U.S. grocery stores. But he sees the potential growing. Grocery stores aren’t just checkouts and food; they’re ostensibly last-mile distribution hubs. Regardless of how delivery technology develops, collecting well-positioned sites in growing population centers will pay off for a long time to come. Spending by consumers may rise or fall. But everybody needs to eat.

“Grocery was supposed to be swallowed up online, it was supposed to be swallowed up by nationwide competitors, and it’s not happening yet,” said Placer.ai’s Chernofsky. “Brick-and-mortar grocery stores are very strong. It’s an anchor for a reason.” 

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