Over the past decade, there has been a significant amount of consternation about the coming collapse of retailers who rely on a physical location for sales. To be certain, there have been warning signs. In the past few years alone, iconic retailers like J.C. Penney, Neiman Marcus, J. Crew, and Brooks Brothers filed for bankruptcy. But, not all retail sectors have suffered the same fate. Retail companies that sell essential goods – like grocery stores – have survived, even thrived in a challenging retail environment.
In this article, we are going to describe the 2022 outlook for investing in grocery store anchored retail shopping centers and highlight the vehicles through which this can be accomplished. By the end, readers will have the information needed to determine if a grocery store anchored retail investment is a good fit for their own objectives.
At First National Realty Partners, we are a private equity firm that specializes in the acquisition and management of grocery store anchored retail shopping centers. If you are an accredited investor and would like to learn more about our current investment opportunities, click here.
In order to understand the outlook for grocery store anchored REITs, it is first necessary to define exactly what one is. To do that, it is easiest to break this definition up into its two parts.
What is a Grocery Store Anchored Retail Center?
In commercial real estate (CRE), a grocery store anchored retail shopping center is a retail property that is “anchored” by a grocery store, which means that the grocer tenant occupies a large portion of the leasable square footage in the property.
Our High Point Harris Teeter Center is a perfect example of a grocery store anchored shopping center. It has 192,548 total leasable square feet and a Harris Teeter grocery store leases 57,603 SF or ~30% of the total space. They are the largest tenant and their presence is meant to generate traffic to the center from which the supporting tenants – like PetSmart and The UPS Store – can benefit.
What is a Real Estate Investment Trust?
A Real Estate Investment Trust (REIT) is an investment vehicle that provides individuals with an opportunity to purchase shares in a company that owns, operates, or finances commercial real estate assets. As a result of their share ownership, investors are entitled to a portion of the income and profits produced by the underlying assets. In addition, as long as the REIT’s dividend payout is equal to a certain percentage of its income, there are some tax advantages to a REIT investment.
REITs can be publicly traded, meaning that their shares can be bought and sold like stocks, bonds, or mutual funds on major exchanges like the New York Stock Exchange (NYSE). This provides REIT investors with a degree of liquidity that is not normally available in the commercial real estate asset class. Examples of publicly-traded REITs with a substantial amount of grocery store anchored shopping centers in their portfolio include companies like Weingarten Realty Advisors, Kimco Realty, and Site Centers Corp.
REITs can also be privately traded, which means that their shares cannot be bought and sold on major stock exchanges. Instead, they are sold directly to investors who meet certain income and net worth requirements. Privately held REIT shares are not as liquid as their publicly traded counterparts and often require a holding period of 5-10 years during which time the investor’s capital cannot be accessed.
So, as the name suggests, a grocery store anchored REIT is a real estate investment trust that invests in grocery store anchored retail centers. These are differentiated from other retail REITs that may specialize in other property types like shopping malls or single tenant, net leased properties.
So, What Is The Outlook For Grocery Store Anchored REITs in 2022?
For the purposes of this article, the focus is on publicly traded REITs whose outlook has both positives and negatives headed into 2022.
At the dawn of 2022, there is much to like about the grocery business. We want to highlight three key data points.
The Fundamentals Are Strong
According to the Census Bureau, via YCharts, monthly grocery store sales grew from $63.7B in December 2020 to $68.9B in December 2021, an 8% annual increase. These rising sales have contributed to increased profitability, which is a net positive for the credit risk related to grocery store tenants. Fundamentals are, and will continue to be strong throughout the course of the year.
The Online/Pickup/Delivery Business is Growing
Supermarket News reports that U.S. online grocery sales grew 3.5% in December 2021 and are approaching a $100B annual run rate. Further, 70% of U.S. households or 93 million received at least one order over the course of the last year. Both of these figures suggest that grocers are finding increasing success with their online/pickup/delivery business, which bodes well for their long term health.
Grocery Real Estate is Valuable
As the online channel continues to grow for all retail goods, grocery stores are playing an increasing role in the “last mile” delivery of goods to online buyers through delivery and in store pickup options. Given their proximity to the communities they serve, the physical real estate occupied by grocery stores is becoming increasingly valuable, not just for a place to buy groceries, but for their additional distribution capabilities.
For these reasons and others, it is expected that grocery stores will continue to perform well in 2022.
Despite the strong fundamentals, it won’t be all smooth sailing for the grocery business in 2022. Notable challenges include:
Supply Chain Disruptions
From COVID safety protocols to mass resignations, backups at ports, and the lack of truck drivers, the supply chain that delivers food from producers to grocery store shelves has snarled at multiple points. The result is empty store shelves, which represents a real risk to grocery store sales. While this is widely expected to be a relatively short term issue, it looms as a threat to performance in 2022.
From an investment standpoint, it is only logical to pursue deals with companies that have the most secure supply chains. These are mostly larger companies like Publix, Whole Foods, Kroger, or Walmart.
The December 2021 inflation reading printed an inflation reading of 7.0% annually, the largest increase since 1982. Within this number, prices for food rose at a 6.3% annual rate – which can present an affordability issue for grocery shoppers.
In what is being called The Great Resignation, the pandemic has driven workers to quit their jobs in record numbers. This trend is especially pronounced in retail and fast food jobs where workers are leaving for higher wages and safer work environments. For grocery stores, the impact has been rising wages and staffing shortages that can impact the shopping experience. The shortage part of this issue is expected to slow down in 2022, but on a longer term basis it is expected that wages will rise and/or grocers will have to make capital investments in systems that make a store run more efficiently – like self checkout stations. These investments can impact the balance sheet and/or a company’s attractiveness in capital markets.
Even with these challenges, grocery store anchored retail space is widely regarded to be one of the safest options in the retail real estate sector. For those that agree, there are two common ways to allocate capital to these investments.
How to Invest in Grocery Store Anchored Real Estate: REITS vs. Private Equity
Real Estate Investment Trusts
As described above, a REIT is a firm that buys, manages, or finances commercial real estate assets. For investors who choose to access grocery store anchored centers via REITs, there are pros and cons to this approach.
Benefits of Investing in a REIT
The primary benefits to investing in a REIT include: high dividend yields, a steady income stream produced by the cash flow from underlying properties, and fractional ownership of a diversified portfolio of high quality commercial assets normally only available to institutional investors.
Drawbacks of Investing in a REIT
The key drawback to a REIT investment is that investors have no say in the investment strategy or what specific properties their money is used to purchase. In most cases, their capital goes into a “blind pool” and the investment manager chooses how it is invested.
In addition, the price movements in publicly traded REITs can be subject to the whims of public markets and they may have nothing to do with the fundamentals of the underlying real estate. For example, the shares of the Retail Opportunity Investment Corp (ROIC) fell from ~$20 to ~$17 in the first weeks of 2022 without any significant change in the fundamentals of the property portfolio.
For investors that prefer more control, a single deal private equity investment is an attractive alternative.
Private Equity Firms
A private equity investment firm has a mandate that is similar to that of a REIT – to deploy investor capital into commercial real estate assets. However, the legal structure of a private equity firm is very different and they are not required to pay a percentage of their income as dividends. By definition, shares in a private equity firm led deal are only available to “Accredited Investors” who meet defined income and/or net worth hurdles.
Certain private equity firms also offer “blind pool” investments, but these have the same drawbacks as a REIT. Instead, we believe that the “single deal” structure is superior. With this type of investment, individual investors can select the deals, property type, market, retail tenants, and locations that are the best fit with their individual requirements. This way, they can perform their own due diligence and retain a reasonable amount of control over the property selection process. However, once the property is purchased the private equity firm takes over and manages the maintenance and leasing activity for the property, and investors do not have any day-to-day responsibilities.
First National Realty Partners is an example of a private equity firm that offers single deal investment opportunities.
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.
To learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.