Key Takeaways

  • A grocery store anchored retail shopping center is a property where a grocery store leases the majority of the available space.
  • A cap rate is an investment performance metric that provides an indication of the annual return investors can expect on a purchase.
  • The cap rates paid for grocery store anchored retail centers are highly dependent upon the market in which the property is located and the specific grocery store that anchors the center.
  • Cap rates for grocery store anchored centers have remained relatively steady throughout the pandemic due to the enduring necessity of the items they sell, their ability to adapt to pandemic shopping trends, and their increasing profitability. 
  • In the near and medium term, cap rates for grocery anchored properties in the most desirable locations, with the most desirable tenants are expected to remain steady or fall (which causes prices to rise), cementing this particular asset class as a safe haven from the relative uncertainty surrounding retail assets in general.

What Are Grocery Store Anchored Shopping Center Cap Rates?

For years, retailers who were solely reliant upon a physical storefront have been losing market share to companies who have opted to pursue an omnichannel sales strategy.  Then, the Coronavirus pandemic hit and accelerated this transition at a pace not previously seen.  As a result, companies who sell non-essential items like clothing have continued to struggle while other companies that sell essential items like grocery stores have thrived.

As a professional commercial real estate investment company who focuses almost solely on the acquisition and management of grocery store anchored shopping centers, we are often asked about our cap rate outlook for this particular segment of the retail investment space.  In this article, we are going to provide just that.  Let’s start with two key definitions.

What is a Grocery Store Anchored Shopping Center?

Within the realm of commercial real estate investment, a grocery store anchored shopping center is a specific type of retail center whose “anchor” tenant is a grocery store that leases the majority of the available space.  Often, the grocery store is surrounded by other tenants – like a dry cleaner or sandwich shop – whose businesses benefit from the traffic generated by the grocery store.

Our West Market Street Station property in Akron, Ohio offers a perfect example of a grocery store anchored shopping center.  It has 54,166 square feet of Gross Leasable Area and it is anchored by a Whole Foods grocery store who leases 30,173 SF or 56% of the total space.  Whole Foods is supported by tenants like OrangeTheory Fitness, LuluLemon, and Moe’s Southwest Grill who attempt to convert the grocery store traffic into sales for themselves.

What is a Cap Rate?

The cap rate is a financial metric that is used to measure the potential return on a commercial real estate investment and it is calculated as a property’s Net Operating Income (NOI) divided by its purchase price/value.  

Cap rates can also be used as an indicator of the health of a particular investment sector.  If cap rates decline over time, it means that there is strong demand for the sector and investors are willing to pay higher prices for those properties.  If cap rates for a particular market segment are rising, it means that demand is not as high and prices are falling to bring buyers to the table.

With these definitions in mind, let’s turn to a discussion on cap rates for Grocery Store Anchored Shopping Center Cap Rates in 2021.  

Grocery Store Anchored Shopping Center Cap Rates in 2021

Cap rates can vary widely based on the market and the shopping center’s tenants.  This point is illustrated in  CBRE’s Cap Rate survey from Q3 2020 (most recent data available), which provides insight into the cap rates for both retail in general and grocery store anchored centers specifically.  They are seen for major metro areas in the table below:

 

The big takeaway from this table is that cap rates for grocery store anchored retail centers are a mixed bag.  This is because this particular survey is measured from 2Q19 to 2Q20, which was pre-pandemic and mid-pandemic, an uneven comparison.  As a result, the impact of the pandemic may not be fully reflected in these cap rates.  That said, markets like Baltimore, Charlotte, Dallas, and Houston have seen cap rates fall (prices rise) for retail sector properties with a grocery anchor.  This is a sign of their enduring strength.

But, all grocery store anchored centers are not created equally.  For additional context, the following chart from Real Capital Analytics shows the variability in cap rates based on which grocery store anchors the center:

It is no coincidence that stores like Whole Foods, Trader Joes, and Publix command the lowest cap rates (highest price) because they are well known for their devoted fan base and loyal shoppers.  On the other end of the spectrum, stores like Kroger and Food Lion command the highest cap rates (lowest price).  Again, this is no coincidence as these stores do not command the same level of loyalty as the others.

Based on this data, the important point about grocery store anchored cap rates in 2021 is that the full impact of the pandemic may not be fully felt yet and there is a significant amount of variability based on the market and the grocery store that serves as the anchor tenant. 

Grocery Store Anchored Shopping Center Cap Rates Beyond 2021

Grocery stores have been a relative safe haven from the chaos that has engulfed other retail assets over the last year.  In fact, grocery sales have surged, which underscores the desirability of having them as an anchor tenant in a shopping center.  According to Melina Cordero, a managing director of CBRE’s Retail Capital Markets business, grocery-anchored shopping centers may be a “bulletproof class” that may “see some cap rate compression in the months to come.”   We support this view based on three factors:  necessity, adaptability, and performance.

The COVID-19 pandemic revealed how crucial grocery stores are to supporting our daily lives.  We all need to eat every day and the grocery store is where food is purchased.  But, the shopping experience will continue to change.  Grocery stores like Amazon-owned Whole Foods and Walmart have taken a leading position in adapting to covid shopping preferences, which includes online ordering and curbside pickup options.  Finally, grocery stores have performed incredibly well over the course of the pandemic.  Paradoxically, Placer Data reports that grocery store visits and visit durations are nearly back to pre-pandemic levels,  In fact, they state that “growing visit durations and weekday shopping trends indicate a continuation of a pandemic-style environment that drives larger basket sizes.”  

To summarize, we agree with CBRE and Placer Data that the necessity of grocery stores has never been greater and that retail centers in which they lease space will continue to perform well into 2021 and beyond.  This investment performance will be driven by the continued strength of grocery store performance and capitalization rate compression in select markets, which could drive prices (and returns) higher.

Downside Risks Remain

While grocery store anchored shopping centers appear to be well positioned for near term success, it doesn’t mean that they are without risk.  Traditional due diligence rules still apply.  Tenant financial condition must be scrutinized now more than ever and non-financial elements of the transaction – like location and market – must be researched thoroughly.  We prefer national tenants and credit tenants who have a long-term track record of performance and growth markets whose demographics are favorable for future rent increases.  

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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