print header

# 1 Commercial Real Estate Information Company

  • Find Properties 
  • Market Properties 
  • Analyze Properties 
Products
Commercial Real Estate News

Grocery-Anchored Centers Remain Choice of Retail Investors, Despite Growing Competition, Investment Risk

"Owning a Property Anchored by a Top Grocery Chain No Longer Guarantees Strong Performance," -- JLL's Chris Angelone
March 13, 2018
Sales of U.S. grocery anchored shopping centers rose more than 5% in 2017, bucking the trend of declining trading volume across most major types of commercial property last year as investors poured into the grocery sector seeking to take advantage of its near-legendary income reliability.

Neighborhood centers anchored by supermarkets and other grocery retailers have continued to attract buyers, even as grocers slowed expansion, opening nearly 29% fewer stores last year following a burst of expansion and store openings of 2016, according to JLL’s recent Grocery Tracker 2018 report.

Meanwhile, market fundamentals for neighborhood centers that constitute the bulk of grocery-anchored centers continue to look very healthy relative to malls and power centers, CoStar analysts say.

Annual demand growth for neighborhood grocery-anchored centers has outstripped supply since 2010 and is expected to do so again in 2018 before reaching a tipping point next year, according to CoStar's 2018-2022 retail forecast.

However, some investors see risks beginning to emerge in the grocery-anchored sector as a result of oversaturation and declining store productivity, CoStar managing consultant Ryan McCullough said in a recent analysis of the retail property sector.

While strong demand for grocery anchored space continues, "we believe we'll see productivity and sales per square foot struggle a bit," in the face of increased competition, McCullough said.

Walmart and other big-box and retailers, along with drug stores, dollar stores and convenience stores, have all sought to expand their food sales, along with a rising tide of smaller-format chains such as Aldi, Lidl, Save-A-Lot and Grocery Outlet on the discount end of the spectrum, and organic food chains such as Sprouts Farmers Market and Whole Foods on the higher-end.

The grocery store expansion has driven up the amount of U.S. grocery space per capita 5% since 2009 to an all-time high of 3.5 square feet, even as per-capital shopping space has decreased 5% across the wider retail market during the same period, according to CoStar data.

While not as exposed to the threat of online competition as general merchandise, home and apparel categories, the number of households buying food online is increasing. Total U.S. households purchasing food online has increased about 4 percentage points over the last three years to 23% in 2017, according to a study by FMI and Neilson.

"Grocers will see pressure to adapt to delivery and pickup models, which may necessitate smaller footprints for in-person shopping, with a focus on fresh groceries," Morningstar Credit Rating analysts Steve Jellinek and Edward Dittmer noted in a recent report.

Some CMBS lenders and investors recently have shied away as spreads have widened between required returns on higher-quality and lesser-quality grocery anchored centers, the Morningstar analysts added.

Lenders appear to be more selective and less tolerant of risk in grocery-anchored properties, as they have shifted to lower-leveraged, lower-balance loans. The average loan-to-value ratio for grocery-anchored properties fell to 62.4% through the third quarter of 2017, from 69.2% in 2014, Morningstar reported.

And although a very small representation size, delinquency rates among CMBS issues backed by properties anchored by mid-market grocers such as Albertsons, Winn Dixie and even Publix stores are also on the rise, McCullough said.

"Owning a property anchored by one of the top grocery chains is no longer a guarantee of strong performance," said JLL's Chris Angelone. "Investors are now looking to hedge risk by finding pockets of 'geographic safety' for their acquisitions. Investors need to keep in mind changing consumer preferences," Angelone added.

While the top grocery brands may not command as much respect from shoppers and investors as they used to, Morningstar analysts maintain that grocery expansion may be welcome news for investors and shopping center owners as grocers strive to move even closer to grocery shoppers.

"Amazon’s purchase of Whole Foods Market Inc. suggests the growth of grocery delivery platforms will increasingly depend on brick-and-mortar locations," Dittmer and Jellimek said.
GET IN TOUCH        Contact CoStar News Team:   News@CoStar.com

 Find us on 

Welcome To CoStar's
Industry-Focused,
Award-Winning News

Winner of three Journalism Awards from the National Association of Real Estate Editors (NAREE)

Award-Winning News