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Who Would Buy Suburban Retail In Today's Retail World? New Market Would

The retail investment arm of Atlanta-based Preferred Apartment Communities wants to continue shopping where most suburbanites still buy their bread and eggs: the neighborhood grocery store.

The Kroger-anchored Woodmont Village shopping center in Cherokee County, recently acquired by New Market Properties

New Market Properties recently purchased Woodmont Village, an 86K SF Kroger-anchored shopping center off Georgia 20 in Cherokee County for an undisclosed sum. The shopping center represents New Market's 36th suburban shopping center buy since Preferred Apartment Communities formed the division more than three years ago. 

“I won't buy anything that isn't grocery-anchored,” Murphy said.

That has led the three-year-old company — a division of the REIT founded by iconic apartment developer John Williams — to acquire some 4M SF of retail in seven states. Murphy said these centers tend to weather economic storms better than other types of retail centers, especially since the portfolio focuses on anchors like Publix, Kroger and Fresh Market.

The grocery industry has held up better during the overall shakeup of the retail industry. New Market also focuses on buying shopping centers in districts with high-performing school systems, especially centers that are close to the schools themselves.

“That's going to promote housing growth,” Murphy said. "People will move there because the schools are good."

New Market Properties CEO Joel Murphy

New Market posted nearly $20M in rental revenues during the first six months of the year.

For more than a year, industry watchers and media have been debating if and how the growth of online shopping is contributing to the decimation of brick-and-mortar stores, with the numbers of retailers filing for bankruptcy this year surpassing those at the start of the Great Recession in 2009. Most recently, Toys R Us entered Chapter 11 bankruptcy reorganization.

But Murphy said there is an undercurrent within this shakeup in the broader retail industry, a merging of online and brick-and-mortar retail strategies that could be a boon for suburban, grocery-anchored properties. Experts saw Amazon's acquisition of Whole Foods earlier this year as a sign the e-commerce giant feels the same way.

What Murphy sees in the marriage of online and street-level retail is that certain properties, especially grocery stores, are becoming the last-mile fulfillment centers for retailers. That will bode well for suburban grocery retail in the future, especially with those centers in strong suburban demographic areas, he said.

“Most of the growth in e-commerce around grocery is focused on the last mile, or getting the goods in the stores to the homes of the consumer,” Murphy said during a Preferred Apartment Communities earnings call on Aug. 1. He said the Amazon/Whole Foods merger emphasized Amazon's need for a brick-and-mortar distribution network. It also will prompt other grocers to enhance their online delivery methods with such players as Instacart and ClickList.

Even though Murphy is bullish, his own company still emphasizes Amazon and other online retailers as a potential downside risk to its grocery-anchored retail buying strategy in filings with the Securities and Exchange Commission.

“Increased competition to traditional grocery chains from new market participants, online supermarket retailers and food delivery services could adversely affect our grocery-anchored revenues and cash flow,” company officials stated in Preferred's second-quarter earnings report Aug. 7.

Retail property pricing trends in Metro Atlanta as of the second quarter of 2017

Even Murphy told analysts the push by online merchants into the grocery world could destabilize some weaker grocers.

“It has become clear in the past few years ... that traditional grocers must be proactive in pursuing online solutions in combination with their brick-and-mortar physical stores,” he said. "We do believe that [the Amazon/Whole Foods] transaction could, and likely will, result in increased margin pressure on grocers, and that will likely accelerate a sense of difficulties at some of the weaker players."

The risk is not scaring New Market and other investors from pursuing suburban grocery-anchored deals, Marcus & Millichap Senior Director Sonny Molloy, of the firm's national retail group, said.

Suburban grocery-anchored shopping centers have been shown to have resilience and better ability to fill empty spaces than the wider retail real estate market, Molloy said. That is catching the attention of even institutional investors and driving up the prices suburban grocery-anchored centers are fetching.

“You're going to pay a pretty penny,” Molloy said. “If they are going after this suburban retail shopping center, they 100% are looking for the best-in-class tenant.”

A recent Marcus & Millichap report demonstrates that suburban retail is growing in favor with investors, especially multi-tenant properties with several credit tenants and a value-add component. Investors have been focused on Gwinnett County, where shopping centers have been trading with a high-8% average capitalization rate, Marcus & Millichap officials said in the report.

Murphy said that he has seen a rise in competition among investors for suburban grocery-anchored retail centers, and that is pushing up the prices for assets.

“Our strategy from the beginning has been on a suburban strategy. But I'm afraid other people are figuring that out,” he said. “There are groups, capital groups, that have shown up in competition in some of these suburban deals that I would say a year ago wouldn't look at it.” 

CORRECTION, SEPT. 26, 2:00 p.m. ET: A previous version of this story incorrectly listed Whole Foods among New Market Properties' tenants. The story has been updated.