• A grocery store anchored shopping center is one in which a grocery store leases a large portion of the space.
  • The strength of a commercial real estate investment opportunity is tied to the certainty with which the tenant will make their monthly rental payments.
  • Given the enduring necessity of the food items sold by grocery stores, the experiential element associated with grocery shopping and the historic stability of the grocery business, a grocery store anchored shopping center tends to be a relatively safe investment.
  • For individuals who believe that grocery stores represent a good investment opportunity, there are two vehicles through which this can be accomplished, REITs and Private Equity firms.
  • A REIT is a specialized type of investment company that uses investor capital to purchase commercial real estate assets.  As long as they pay out a certain percentage of their income as dividends, they provide certain tax advantages to their investors.
  • Private Equity firms follow a similar mandate, but are structurally different.  To invest in a private equity deal, investors must meet certain income and net worth requirements.
  • We believe that “single deal” investment opportunities offered by private equity firms are the best bet for  most individual investors because they can select a property, market, and location whose risk profile mostly closely resembles their own preferences.

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 2020 alone, iconic retail stores 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 or experiences have fared relatively well, in particular grocery stores have been a stand out.

In this article, the benefits of investing in grocery store anchored retail shopping centers are highlighted and the vehicles through which this can be accomplished are discussed. To start, it is necessary to define exactly what a grocery store anchored shopping center is.

What is a Grocery Store Anchored Retail Shopping Center?

In commercial real estate, a grocery store< anchored retail shopping center is a type of retail property that is “anchored” by a grocery store business.This 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.

In a climate where e-commerce< retailers continue to gain market share, there are three advantages to investing in a grocery store anchored retail shopping center.

Why Grocery Store-Anchored Shopping Centers Have Become So Attractive to Investors  

From an investment standpoint, a major portion of the value of a commercial property is derived from the certainty with which a tenant will make their monthly rent payments.  And, a tenant’s ability to make their rent payments is derived from the success and stability of their business.  Grocery stores perform well on both fronts due to the necessity of their product offering, the experiential component of their shopping experience, and the historic stability of their business.  Each of these factors is discussed in detail below.

Perhaps the most significant advantage to investing in a grocery store anchored shopping center is that grocery stores sell a product (food) that is necessary for daily survival.  And, that product is perishable and must be replenished on a regular basis.  For this reason, grocery stores are unlikely to experience the same level of disruption that retailers who sell non-essential goods have experienced.

Second, the experiential component of the grocery shopping experience and the individual preferences of each shopper mean that this an experience that is optimized for in person shopping.  For example, shoppers like to feel the ripeness of a piece of fruit or prefer to pick the specific cut of meat that fits their preferences.  These are not things that can happen when purchasing groceries online.

Finally, for each of the two reasons above, the grocery store business has historically been a stable one, even during an economic downturn. This can be seen when looking at the financial statements for a publicly traded grocery store like Kroger. They reported $122b in sales in 2018, $121b in 2019, and $122b in 2020.  And, in the first quarter of 2021, they reported a surge in pandemic driven shopping. The point is this, the grocery business is a historically stable one that provides investors and property owners with a great deal of confidence that the rent is going to be paid on time every month, for the duration of the lease.  This type of confidence can be seen in the valuation of and returns delivered by grocery store anchored shopping centers.

For individual real estate investors that are convinced in the return potential of a grocery store anchored investment, there are two vehicles through which this can be accomplished, REITs and Private Equity Firms.

Investing in Grocery-Anchored Real Estate Through REITs vs. Private Equity Real Estate Firms

Real Estate Investment Trusts

A Real Estate Investment Trust (REIT is a specialized type of investment vehicle that provides investors with an opportunity to purchase shares in a company that owns 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 REIT investment.

REITs can be publicly traded, which means that shares in them can be bought and sold like stocks, bonds, or mutual funds. 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 by the REITs themselves and investors must 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.

The primary benefits to REIT investment 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. But, the key drawback 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.  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.  Also like REITs, private equity firms specialize in certain segments of the CRE market. 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. We invest almost exclusively in grocery store anchored shopping centers.

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 info@fnrpusa.com for more information.

 

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