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Writer's pictureJason Liu

Rising Grocery Prices, or Election Year Spin? Retail Real Estate Can Win Either Way.

Updated: 7 days ago

By Jason Liu, Partner, Capital Markets, Hyperion Realty Capital


Yes, it’s true. Grocery prices are up 21% over the last three years according to the US Labor Department. To offset the increased spend, Americans now shop for groceries at an average of 20.7 different retailers, up 23% versus a year ago.[1] The choices seem countless, and even traditionally non-grocery options are also showing up with new food choices.


Savvier shopping center operators have figured out that once you shop at a favored store, you’ll tend to have loyalties to popular adjacencies as well, or as they are better known in real estate parlance, “co-tenants”. The wider the variety, yet more like-minded, the better.


As a result, multi-stop grocery shopping is much more common for Americans seeking to soften the blow from rising prices. Retail, especially when done right, provides consumers a delicious culinary and experiential escape by providing the right options at value pricing.


Among the “four major food groups of commercial real estate”, Retail has been known to be the most dynamic and entertaining versus its peers in Multifamily, Industrial, and Office. Many Americans have a strong affinity or even more extreme loyalties with certain labels and brands. Shoppers tend to choose between Kroger or Trader Joe’s, drink coffee at Starbucks or Dutch Bros, treasure hunt at Costco or TJ Maxx, or indulge at Chipotle or Sweetgreen.


More likely, shoppers visit several or even all of the above. The industry term for necessity shopping is Grocery Anchored Retail, which means open air centers where you can park your car and swiftly walk to the supermarket or daily use themed stores located next door.


After Amazon purchased Whole Foods in 2017, there was an industry wide downward spiral, led by a media fueled “Retail Apocalypse”. Much of Retail was dismissed as a yesteryear category that was predicted to fade with the rise of shopping from smartphones and the general online shopping specter. It took a global pandemic to parse the individual fortunes within varying Retail strategies. Valuations fell overall, Retail became toxic, and many “B & C” malls went away. Throughout that malaise, there was one bright Retail corner that gave Americans relief, sometimes sparking outright joy. Enter Grocery Anchored Retail. It doesn’t hurt that the grocer anchor tends to have percentage rent clauses either, which means that they pay higher rent when groceries cost more, especially during times like today. It’s good to be an owner again.


The pandemic contributed to the rebound and rise in Grocery Anchored Retail due to vast behavioral changes. It is now clear that the hybrid working model is here to stay, and we can see the impact in the form of shopping center occupancy at historic highs, eclipsing 95% occupied in 2023. It means that new prospective tenants are finding it difficult to find available spaces for rent, and it also means higher operating income for owners. The average time it takes to lease a space is at all-time lows, taking under 10 months to lease for the first time. [2]



A third metric that shopping center owners track is Gross Leasable Area, the area of the center eligible for rent. GLA has been shrinking for the last fifteen years, and it is at the lowest point now and steadily falling still.

 

There was a noticeable movement to suburban migration during the pandemic, and Grocery Anchored Retail centers benefitted from that demographic change. Many clothing, footwear, and department store retailers left enclosed shopping malls in favor of open-air centers, which tend to be more cost-effective and better suited for efficient shopping. Expanding demand from medical uses was already gaining favor before the pandemic, and it is commonplace to see offerings such as optometrists, dialysis, vet clinics, dental offices, chiropractors, and similar today. Many centers that struggled before CV19 are no longer around, making the existing inventory even more desirable. In fact, store openings have exceeded store closings for the third consecutive post-pandemic year.[3]



Less popularly known is how shopping center owners benefit from Grocery Anchored Retail real estate being “Triple Net”. Essentially, owners are only responsible for the parking lots and the roofs, while everything else falls under tenant responsibility. Removing unforeseen costs translates to predictable income. The best shopping center owners realize that some centers are just plain nicer to shop at than others. Bright shopping center lighting makes shoppers feel safer at night. Well-maintained parking lots and landscaping further add to shopping comfort. Experienced shopping center operators implement these standards from the early stages of ownership, and improved tenant mix tends to follow as a result. It is no accident that a center with top grocer will often have a popular coffee shop, a pharmacy, a branch from a leading bank, several fast casual meal offerings, a hair and nail salon, and a gym on site. These shopping adjacencies seize on common shopping habits, and experienced operators know how to realize desirable combinations. 


One of the early escapes from lockdown was the chance to shop for necessities again. Whether at the grocery store or drive-thrus, shopping for food and necessities kept Americans with a sense of normalcy, back when things weren’t normal. The difficult period reinforced and elevated Grocery Anchored Retail as a contrarian and resilient niche. Necessity Shopping evolved, and went from a daily or weekly need to an escape, to a national pastime, and hovers in between all those categories once again. Even during times of rising grocery prices, Americans have proven how they still like to shop, and shopping is here to stay.


[3] Ibid



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