The Private Equity Real Estate Podcast – Show 26

   

   

Summary

On this week’s episode, we discuss grocery-anchored retail. Our guest this week is Tony Grosso. He is the co-chairman, managing principal and founder of First National Realty Partners, one of the nation’s leading commercial real estate private equity firms.

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Announcer:
You’re listening to The Private Equity Real Estate Podcast, brought to you by First National Realty Partners, where investors learn from private equity experts and insiders. We share our own real world experiences so you know exactly what it takes to be highly successful at investing in passive commercial real estate opportunities.

Eric Murphy:
Hello, and welcome to The Private Equity Real Estate Podcast, which is brought to you by First National Realty Partners. I’m your host Eric Murphy, and on this program we like to sit down with experts in commercial real estate and chat about different topics across the commercial real estate landscape.

Eric Murphy:
This week, we’re going to make the case for grocery anchored retail. Joining us today to talk about it is a returning guest, Tony Grosso. He’s the co-chairman, managing principal, and founder of First National Realty Partners, one of the nation’s leading commercial real estate private equity firms. Mr Grosso’s been involved in all phases of First National Realty Partners’ development since it’s founding, and we’re always happy to have him on the show.

Eric Murphy:
Tony, welcome back to the program.

Tony Grosso:
Eric, good to be back as always.

Eric Murphy:
Well Tony, as I mentioned in the opening, today we’re going to talk all about grocery-anchored retail. Let’s start with what are anchored tenants, and what makes them so important?

Tony Grosso:
When you’re looking at a shopping center, or a mall, or any retail center, an anchor tenant is one of consequence. Figure a marquee tenant, a larger tenant. It could be from a square footage standpoint, it could be a major driver, but I think you’re talking about larger tenants, guys that are a majority of a rent roll. You can also look at an anchor tenant from a standpoint of it’s a big traffic draw. That tenant anchors the property.

Eric Murphy:
Now, is there something particular that makes an anchor tenant? Are they generally mostly national brands, or a particular type of retail?

Tony Grosso:
No, it doesn’t necessarily have to be. It could be a regional or a local. But, it’s really the larger tenant in a property. Even when you’re looking at office buildings or industrial complexes you could say, “Hey, my anchor tenant is so-and-so, they really anchor and stabilize the property.” But, it doesn’t necessarily have to be a national name.

Eric Murphy:
Well, when it comes to anchor tenants, and today we’re talking about grocery, what makes grocery stores unique among retailers?

Tony Grosso:
Yeah, I’m a big grocery guy, a proponent for grocery anchored retail. Obviously, that’s the business that we’re in. Grocery’s great, and you look even what’s happened through the pandemic, is it’s an essential use. It’s the heart of all communities, is eating food. When you’re able to take that use, which is so essential to day-to-day life for everybody, and stick it in your property, the draw of traffic that it brings and just the use overall, it’s necessity based. It’s not some fad or fashion that can come or go, it’s something that’s so necessity based to all communities that it really, in my opinion, stabilizes and adds an extra amount of value, versus a non grocery anchored retail property.

Eric Murphy:
Well, you mentioned the pandemic and it really does seem like grocery stores have managed to do pretty well through all of this. Why do you think that’s the case? Why do you think they have been relatively stable compared to maybe other types of retail?

Tony Grosso:
Yeah. We’re actually finding the grocers are up 20%. It’s a blanket statement to say retailers haven’t done well throughout the pandemic, because we’re finding that some have not, there’s no question about it. But, we’re also finding a pocket of them that have actually done really well, and grocery really leads the charge there. We’re finding most of our grocers are up 20% sales year over year, say 2020 to 2019, and we’re seeing continued growth here into 2021.

Tony Grosso:
But, as far as why grocery has done well throughout the pandemic, it’s what I elaborated on a little bit earlier. It’s an essential use. It’s so important to human beings to be able to eat food, and the lion’s share of the population gets their food every day from a grocery store, that they consume. And that intense daily needs, essential type use really can’t be understated. It really, really adds value to a property.

Eric Murphy:
Now, do you think part of the reason that grocery continues to thrive during the pandemic is because of its experiential nature? People want to be out in grocery stores, and picking their own food.

Tony Grosso:
You know what? Not necessarily. You may be shocked to hear me say that. But, I think there always will be some element to it, but I do see more use into this omni-channel approach where people are using Instacart, and all kinds of delivery functions, and all that stuff. But, I do believe there always will be some component, you can argue back and forth of what percentage of people need to get in there and use the store. I personally do everything on Instacart, for all my grocery shopping, and it’s highly convenient. I actually believe stuff like Instacart and delivery services are actually adding more value, which may seem contrarian to the grocery store uses.

Eric Murphy:
Well, what kind of benefits does having grocery anchored retail bring to a shopping center and the other tenants?

Tony Grosso:
I think the number one answer is just a draw, from a population and the foot traffic standpoint. You’re bringing people to the site. And the theory in the grocery anchored business is that, and has been for many years, has always been the grocer brings a lot of the traffic, and then the ancillary use is that tenant mix that supports that grocer thrive off of all that population being driven in traffic to the site.

Tony Grosso:
What we’ve seen … when we’re looking at deals, we’re only looking for the number one or number two property in a sub-market, with a number one or number two grocer in a market for that very same reason. We’re also looking for high performance out of our grocer. Tenants can come, tenants can go, but when you have you anchor tenant that’s really performing and doing gangbusters in a location, it tells a story that can’t be understated. That hey, whatever it is, it’s the corner that it sits on, it’s the market that it’s in, it’s the sub-market that it’s in, it’s the tenant mix, there’s something going on here that’s really having our anchor perform well here, and that can’t be understated. Very, very important.

Eric Murphy:
You mentioned tenant mix. Can you elaborate on that a little bit? What exactly is a tenant mix, and why is it so significant?

Tony Grosso:
Yeah. This is when you get to the next level of leasing is you really want to merchandise your center properly, almost if you were retail and merchandising goods in their space. We really look for complimentary type uses. We want to find tenants that are going to compliment our anchor or our grocer really, really well. You can’t understate that, either. You don’t want to have too many of one type in one center, even though there are power centers or even outlet centers that are, let’s say, in the same space, all the different tenants are in the same space, because there’s original draw.

Tony Grosso:
When we’re looking at our grocery anchored centers, though, we want a nice complimentary mix of restaurants, daily needs uses, the grocer anchoring it, and there’s all kinds of tenants and concepts that are coming out. But, we like to have that nice merchandising mix where they can flow off one another. So somebody can do their banking, and then they can go get a bite to eat, and then maybe there’s a junior box there where they’re doing some discount shopping and they’re doing the treasure hunt model. And then, they’re getting their groceries. So you can create this one stop situation.

Eric Murphy:
What factors so you take into account, if you’re trying to create a good tenant mix?

Tony Grosso:
Like I said a little bit earlier, you really just want it to be complimentary. You want the tenants to do well because ultimately, real estate overall, and retail real estate especially … But, real estate overall is really just a function, commercial real estate, of how well your tenant is doing in that space. We want uses coming to the site that are going to continue to thrive and do well, because we’re going to be able to charge more in rent as time goes on, which is going to give us that operating income growth, which is going to increase the value of our investment.

Tony Grosso:
You want uses that are going to come in, compliment one another, and drive sales higher and bring more traffic to each other, and have a nice symbiotic relationship.

Eric Murphy:
Well, you’re sharing some good instances of complimentary tenant mixes. Can you give us a scenario of a tenant mix that maybe is not an ideal fit?

Tony Grosso:
You know, in this day and age you’re seeing all kinds of different concepts coming out. People, I think, generally have this idea that retailers are just starting to now go out of business. Since the beginning of time, you’ve seen chains come and go. What we’re seeing us unique back fills. Sometimes we’re seeing trampoline parks that are taking old vacant boxes. We’re seeing storage uses that are taking old vacant boxes. There’s all kinds of different uses that are coming into shopping centers, and I actually think it bodes well.

Tony Grosso:
See, the one thing that you don’t hear people talk about and why I’m such a bull for real estate, and maybe I’m jumping the gun here, but I love retail real estate because it’s close to the customer and that can’t be understated. When you look at a good grocery anchored center, or a good retail center, you’re going to see a lot of house tops in the area, the rooftops in the area. What that means is that the more proximity you have to your customer, the shorter that last mile is, and the easier it is for your customers to access your goods or services. Whether it’s a physical product that can be shipped, using Instacart or one of these delivery services, or a drone eventually, or you getting to the site to go eat lunch or whatever it may be. I really can’t understate that.

Eric Murphy:
Okay, great. Today we’re talking about grocery anchored retail with our guest Tony Grosso, here on The Private Equity Real Estate Podcast, brought to you by First National Realty Partners.

Eric Murphy:
A little bit about our sponsor. First National Realty Partners is a rapidly growing commercial real estate private equity firm that owns and operates more than three million square feet of real estate throughout the United States. With a portfolio valued in excess of $400 million, First National Realty Partners focuses on expanding its portfolio by acquiring market-dominant, well-located commercial assets, well below replacement cost. First National Realty Partners actively manages its portfolio through an in-house team compromised of more than 30 full-time real estate professionals, focused on acquisitions, property and asset management, leasing, finance, accounting, and investor relations. If you would like to get in touch with someone at First National Realty Partners, you can always email them at info@fnrpusa.com.

Eric Murphy:
Today, we are happy to be joined by someone from First National Realty Partners, the Co-Chairman, Managing Principal, and Founder, Tony Grosso. Today, we are talking about grocery anchored retail.

Eric Murphy:
You know Tony, there has been an increase in online grocery shopping, but it doesn’t seem to be as prevalent as it is with other retailers. Why do you think grocery has been less affected by eCommerce?

Tony Grosso:
Again, I’ll go back to my contrarian point of view. I think as eCommerce continues to develop, grocery anchored retail is going to continue to do better. One of the big pros that these grocers have, or a Walmart or Target, whoever, versus say Amazon, is their last mile distribution costs are way less. In my opinion, in the future what’s going to happen is that box is going to become the defacto last mile distribution site, and Walmart and Target, and some of the other boxes, have big advantages over Amazon because their costs are less, because they’ve got this great real estate with all these rooftops nearby. Ultimately, that’s what’s going to drive value. The box of today may be the distribution facility of tomorrow.

Tony Grosso:
But, I do believe there is an element of what you’re talking about, which is there will be a subset of people that always want to go into the store, there’s a lot of people. Whether it’s 100 years from now, or whether it’s tomorrow and there’s older people that are always used to going to the store, I always think there’s going to be some mix of people that want to go in. They want to inspect their produce, they don’t know what they’re looking for. There’s definitely going to be elements of that.

Tony Grosso:
But regardless, I think grocery anchored retail bodes well, as eCommerce continues to develop and flourish.

Eric Murphy:
Yeah. You brought up omni-channel a minute ago. Can you tell us a little bit more about that? And, how you think that will shape the future of the grocery space?

Tony Grosso:
Yeah. You’ve really seen this accelerated throughout the pandemic, and it’s not just grocers. It’s all retailers, whether it’s food delivery with all the different apps that are out there now. But, the real estate assets that are going to do well are going to be the really, really well located ones. I don’t think that the real estate business is going to change. It may come through phases and look a little bit differently, but ultimately real estate is all about location. On the commercial real estate standpoint, it’s all about how those tenants, how badly do they need to be in that space for their essential operations for them to generate a profit. That’s the ultimate question of real estate.

Tony Grosso:
I think as time goes on, the omni-channel is going to be able to benefit from the location of these really well located centers. If you’re a pizza guy and you’re now adopting a delivery system, the closer you are to your customers and the more customers in your proximity, the better chance you have to do business. I don’t think that changes, whether you’re doing delivery or whether somebody’s coming in and buying a slice of pizza. It’s the same thing with the grocery concept. The more density that you have, the better area that you’re in, the better location and signage you have in the sub-market, I think it’s going to bode well, there’s no question.

Tony Grosso:
Whether eCommerce develops completely, or there’s a big chunk of people … I don’t have a crystal ball. There’s a big chunk of people that are still coming in and shopping in the store. I think it’s all location based, and that’s why I’m a big bull for grocery anchored retail.

Eric Murphy:
Well, what are some other technological advances that you see on the horizon in the grocery space? Whether it’s something that came out of the pandemic or not, that you think maybe grocery stores will adapt into their future business model.

Tony Grosso:
I think the big takeaway is just the whole delivery model. Whether you’re getting that to somebody with an automated driving car in 10 years, whether it’s a drone picking something up, I think the delivery of goods, and these boxes eventually becoming tomorrow’s last mile facilities, is definitely going to be the big push in the grocery space.

Tony Grosso:
There’s all kinds of stuff, though. Stores where you don’t need cashiers, not even self checkout, you just walk right out. There’s all kinds of crazy advances that are going on. But, I think the big one is going to be getting the goods to the customer in the fastest amount of time, and that’s going to be done through delivery and all kinds of technologies that get it there faster.

Eric Murphy:
Well before I let you go, Tony, I’m curious. How does grocery anchored retail fit into First National Realty Partners’ philosophy?

Tony Grosso:
We’ve really built this as the backbone of our strategy. I’ve worked with all product types, whether it’s industrial, multi-family, office, medical office, non grocery anchored retail. I really like, for all the reasons that we talked about today, I like grocery anchored retail. I love the essential nature of it.

Tony Grosso:
Now, if you’re out buying regional malls … Retail’s been painted with such a bad light, and I think grocery’s been lopped in there. But, if you’re out looking at regional malls in tertiary markets, there’s probably going to be some shift there. We’ve already seen that shift happen in a big way, and mall owners haven’t done well. But, when you’re looking at anchored assets with the number one or two national or regional type grocer in a market, the number one or number two sites, I think 500 years from now that’s just as viable. The fact that we can step in here and pay, buy stuff, at higher cap rates than multi-family, which right now is three cap, four cap. You make one wrong move, and you can’t meet that service. I just think it makes a lot of sense.

Tony Grosso:
Additionally, grocery anchored retail, or retail in general, we can put medical tenants in, we can put experiential tenants like bouncy houses and trampoline parks, and all kinds of different gym uses, and all kinds of experiential uses that are coming out of the woodwork these days. You have a lot of the same characteristics that you find in other product types, like industrial, like office. You can put a general office user in a retail center any time, and you’ve got the same characteristics.

Tony Grosso:
I think it really bodes well. I think it’s been painted with a poor light because people think eCommerce is the end of the world. But if you buy the right assets, I think they’re around for 500 years.

Eric Murphy:
All right, fantastic. Well Tony, if someone wants to learn more about grocery anchored retail or has any questions for you, how would they get in touch with you?

Tony Grosso:
You can just go right to our site. It’s F-N-R-P, First National Realty Partners, fnrpusa.com. My email’s on there, my team is on there, and happy to chat with anybody. Very passionate about real estate, and specifically grocery anchored retail.

Eric Murphy:
Tony Grosso, co-chairman, managing principle, and founder of First National Realty Partners, we always appreciate the time. Thank you for being on the show.

Tony Grosso:
Hey Eric, thanks a lot. Appreciate you having me on.

Eric Murphy:
My thanks again to our guest today Tony Grosso, and thank you for joining us here on The Private Equity Real Estate Podcast, brought to you by First National Realty Partners. I’m your host Eric Murphy, reminding you to please subscribe, rate, and review the podcast if you haven’t had the opportunity to do so already. We appreciate it, and we thank you for listening.

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