When it comes to commercial real estate investment, REITs are one of the most accessible options for individual investors. But, there are many different types of REITs that specialize in specific property types and investment strategies, such as grocery store REITs. As a result, it can be easy for investors to feel overwhelmed by the number of choices.
In this article, we cover a specific type of REIT that invests in grocery store anchored shopping centers. By the end, readers will have a strong understanding of what a grocery store anchored shopping center REIT is, why they may be a good commercial real estate investment, and how they compare to the types of private equity grocery store anchored shopping center investment opportunities that we offer.
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What Are Grocery Store Anchored Shopping Center REITs?
Let’s start with a definition by breaking this term into its discrete parts.
A grocery store anchored shopping center is one where a grocery store leases the majority of the space. This point is easily illustrated by our West Market Street Station portfolio property. In this center, there are 54,166 square feet of Gross Leasable Area. Of that space, a Whole Foods grocery store leases 30,173 SF or 55% of the total space. They are the “anchor” tenant. The other retailers in the space include Moe’s Southwest Grill, Lululemon, and Orangetheory Fitness. All of these tenants benefit from the pedestrian traffic generated by the grocery store anchor so there is a symbiotic relationship.
REIT is an acronym for “Real Estate Investment Trust”, which is a specialized type of investment company that owns, operates, or finances commercial real estate. REITs can be publicly traded, which means that shares in them can be bought and sold on major stock exchanges. Or, they can be privately held, which means that shares are less liquid and are typically only available to investors who meet certain income and net worth criteria. Because the world of commercial real estate investment opportunities is so vast, REITs tend to specialize in certain property types or asset classes. For example, American Tower is one of the largest REITs and they invest in cell phone towers. Or, Kimco Realty is a large publicly traded REIT that invests in open air shopping centers anchored by well known grocers like Kroger. Weingarten Realty is another well known real estate company that invests in grocery store anchored retail real estate.
Why Choose Grocery Store-Anchored Retail REITs
There are three reasons that real estate investors like grocery store anchored shopping center REITs: protection from future disruptions, online shopping, and reliable income.
Protection from Future Disruptions
The most compelling argument for the grocery business is a simple one. Grocery stores sell food, which is something that every person needs every day for their very survival. As a result, the grocery business will always be around in some form, which makes them uniquely protected from the types of e-commerce driven disruption that have caused so many issues for companies that sell non-essential items like clothing and electronics.
Online Shopping
If the coronavirus pandemic taught grocery store investors anything, it is that they are more important than ever and that they are remarkably adaptable. At the outset of the pandemic, grocery stores were quick to adapt their business model to ensure that shoppers felt safe during their visits. This includes steps like extra sanitization procedures, one way aisles, dedicated shopping hours for the most vulnerable shoppers, and increased investment in online shopping.
Perhaps there is no better example of the shift to an online grocery shopping experience than with Whole Foods. Because they are owned by Amazon, they have created a simple and convenient online shopping experience that results in home delivery or in store pickup. Given how well these improvements have been received, it is likely that online grocery shopping will be around for years to come in a post-pandemic world.
Reliable Income
Because grocery stores sell essential items and they have proven to be remarkably adaptable, it also means that they produce a very reliable stream of income, which is very desirable from a real estate investment standpoint. As a result, grocery stores are a safe bet, from a relative standpoint, to pay their rent on time each month. This sort of predictability is preferred by firms who invest in retail properties.
But, a REIT isn’t the only vehicle through which to gain exposure to the grocery business. Another option is to invest with a private equity firm. Though the commercial real estate property type and investment goals are similar, the structure is very different.
Grocery Store REITs vs. Private Equity Investments
There are three key differences between grocery store REITs and private equity grocery store investments like the ones we offer.
First, a REIT is a fund, which means that capital is raised for general investment purposes and deployed as the investment manager sees fit. As a result, individual commercial real estate investors have no control over which properties their capital is used to purchase. In certain private equity deals, capital is raised for one property at a time. We prefer this model because it gives investors knowledge about the property, the tenants, the market, and the current leasing activity. With this knowledge, they can perform their own research to determine if the investment is suitable for their own objectives.
Second, under IRS rules, REITs are not taxed at the fund level as long as they pay out 90% of their taxable income as dividends. As a result, the composition of their returns tends to be more heavily weighted towards income (versus appreciation). This impacts the REIT’s investment strategy. Private equity deals tend to be the opposite. The firm is not bound by the dividend payout requirement and can afford to take a longer term view. As a result, the composition of returns tends to be more weighted towards appreciation (versus income).
Finally, there is a major difference between who can buy REITs versus who can invest in a private equity deal. Shares in publicly traded REITs can be bought and sold by anyone with a brokerage account and the capital to purchase them. This makes them more accessible to individual investors and provides more liquidity than a private equity investment. On the other hand, private equity deals typically require an investment time horizon of 5-10 years and investors must meet certain income and net worth requirements. Although they are slightly less accessible, the benefit of this approach is that the private equity firm has the space and time to fully implement their business plan for the property, which can lead to stronger returns over time.
Summary & Conclusion
A grocery store anchored retail center is a shopping center where a grocery store leases the majority of the space. In a typical configuration, the grocery store is the “anchor” and they are supported by a group of smaller retailers with complementary businesses.
A REIT is a real estate company who owns, operates, or finances commercial real estate. REITs can be publicly traded or privately held and they can specialize in specific property types, including grocery stores.
Fundamentally, the performance of a REIT that invests in grocery store anchored shopping centers is a function of the success and stability of the tenants who occupy space within it. As a REIT or an individual investor, having a high quality grocery store for an anchor tenant is a luxury because the grocery business tends to be resilient to the e-commerce driven disruption that has hampered other retailers, it is inherently stable, and it has shown a tendency to be highly adaptable to shopping trends. These characteristics result in a tenant who is a safe (relatively) credit risk.
REITs aren’t the only vehicle through which investors can gain exposure to grocery store anchored real estate. Another common option is the single deals offered by private equity firms, which offer several advantages over the REIT structure.
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 info@fnrpusa.com for more information.
