- Driven by a surge in pandemic related buying, grocery stores have been a relative bright spot when compared with the rest of the commercial real estate retail sector.
- While it remains to be seen whether there is sustainability in this trend, the long term outlook for the industry as a whole looks promising.
- Given the necessity of their product offering, flexibility in adapting to shopping trends, and appetite for continued expansion, we believe that grocery stores will continue to outperform their retail peers.
- Because of this performance, we also believe that shopping centers anchored by grocery stores represent a promising real estate investment opportunity.
For many years, the grocery store business has been slow, steady, reliable, and perhaps even somewhat boring – which is a good thing in the commercial real estate business. But, recent advances in technology and a massive shift in consumer shopping behavior driven by a once in a century pandemic has ignited newfound interest in this sector.
In this article, the near term outlook for the grocery business and the shopping centers they anchor is discussed in detail. By the end, readers will have a good feel for the current trends shaping the future of grocery shopping and how they impact the investment performance of the real estate that grocery stores occupy.
First National Realty Partners is a private equity firm that specializes in the acquisition and management of grocery store anchored retail shopping centers. For more information on our current grocery store investment opportunities, click here.
Grocery Store Business Outlook
Last year (2020) was a banner year for the grocery business. Almost without exception, stores reported material increases in sales driven by pandemic-induced buying and a greater desire to cook at home. For example, Kroger, one of the nation’s largest grocery chains, reported a $10 billion jump in revenue from 2020 to 2021. Costco reported a $12 billion increase in sales and even the relatively small Village Super Markets reported a nearly $200 million sales increase.
This type of financial performance, combined with the enduring necessity of the items sold by grocery stores puts the industry in an enviable position in the short and medium terms. But, a big question hangs over the industry when trying to forecast future performance. Was this surge in sales a one-time event driven by the coronavirus pandemic and government issued stay at home orders? Or, does it have staying power over the longer term?
As investors in grocery store anchored shopping centers, we have a vested interest in the answer to this question because the performance of our commercial real estate (CRE) investments will be partially tied to the performance of our grocery store tenants. Fortunately, we believe that the future will continue to be bright for the reasons outlined below.
Necessity & Personal Preferences
Grocery stores sell food and other items that are necessary for day to day survival. In addition, these items tend to be consumed relatively quickly, which means that they also need to be constantly replenished. There will always be a need for grocery stores, no matter the economic or healthcare environment. Where there is a need for food, grocers will seek to fill it.
Further, the purchase of some grocery items like fresh produce and bakery goods tend to be highly subjective, meaning that individual shoppers like to see, touch, and smell them prior to purchase. These types of individual preferences lend themselves well to an in store shopping experience now and in the future.
In light of the changes in shopping behavior driven by the pandemic and social distancing guidelines, grocery stores have been quick to adapt in the name of safety and customer convenience. For example, they have ramped up their e-commerce offerings with in store pickup and home delivery options. In addition, they have created one-way aisles, contactless checkout, special shopping hours for vulnerable consumers, and increased sanitization standards for carts and baskets. These types of changes have served to make customers more comfortable and made the shopping experience more convenient.
Appetite for Expansion
Despite the near ubiquity of grocery stores, some of the largest players have a strong appetite for continued expansion into new markets and new shopping centers. For example, Sprouts, a fast expanding grocery concept, plans to open an additional 20 stores in 2021. And Aldi – the fastest growing grocery retailer in the US – plans to open nearly 500 more stores by the end of 2022. Other stores like Amazon owned Whole Foods, Trader Joes, Publix, and HEB also have aggressive expansion plans. These create plenty of real estate investment opportunities.
Given the positive outlook for the grocery business in general, the next most logical question is how will this continued strong performance impact commercial real estate investment returns for grocery store anchored retail centers.
Are Grocery Store Anchored Shopping Centers a Good Bet?
In short, yes. We believe that grocery store anchored shopping centers will continue to offer strong commercial real estate investment returns both in the short term and long term. There are four reasons why: financial strength, traffic, long term leases, and liquidity.
In the commercial real estate industry, the performance of a real estate asset is a function of the reliability and length of the income stream produced by tenant rents. Given the enduring demand of grocery items and the recent sales surges, the financial condition of the grocery industry as a whole makes grocery store retailers a safe credit bet for landlords. Like every industry, this strength varies by company. For example, WalMart has a credit rating of “AA” by Fitch or Kroger has a credit rating of BBB from Moodys.
This sort of financial strength provides a significant amount of comfort for property owners, lenders, and investors to ensure that tenants will make their lease payments on time and for the duration of the lease term.
Grocery stores generate a significant amount of shopping traffic. Not only is this good for their sales, but it is an attractive prospect for the other retailers who lease space in the shopping center as well. In fact, the logic behind the grocery store as the “anchor” tenant in the shopping center is that the supporting tenants will be able to capitalize on the traffic by generating sales of their own.
This type of traffic can also drive strong leasing activity for vacant retail space, which results in healthy occupancy levels, and premium pricing per square foot when it comes to rental rates. These are all positives for real estate investors.
Long Term Leases
As the anchor, grocery stores like to secure their space in the shopping center for a long time to come. As a result, they like to sign long term leases – especially in strategically important locations/big cities like New York City, San Francisco, Austin, and Seattle. From an investor’s standpoint, these long term leases – especially with financially sound tenants – equate to long term income streams, lower risk, and higher property valuations.
In a typical retail property, the bulk of profits are made when the property is sold. But, these profits may never be realized if an investor is unable to find a buyer at the end of their holding period. Fortunately, for all the reasons mentioned above, grocery store anchored retail shopping centers tend to find buyers with relative ease when compared with other asset classes/property types.
Summary & Conclusion
Driven by a surge in pandemic related buying, grocery stores have been a relative bright spot when compared with the rest of the retail sector. While it remains to be seen whether there is sustainability in this trend, the long term outlook for the industry as a whole looks promising. Given the necessity of their product offering, flexibility in adapting to shopping trends, and appetite for continued expansion, we believe that grocery stores will continue to outperform their retail peers.
Given the strength of the grocery businesses, we also believe that shopping centers anchored by grocery stores represent a promising real estate investment opportunity. When the financial strength of grocery store tenants is combined with a high level of shopping traffic, long term leases, and buyer demand, we also think that grocery store anchored commercial real estate investments will outperform retail peers.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.
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