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Investor Appetite For Grocery-Anchored Retail Grows As Grocers Slow Expansion

Grocery-anchored centers continue to be a red-hot property type. Increasing sales volumes and decreasing grocery store expansions are making the market even more blistering.

Tanglewood Court
Tanglewood Court

Investment into grocery-anchored centers in 2017 increased by 5.3%. It was one of the only retail sectors to see growth in a year of low retail transaction volume — sale volume decreased by 22.5% in 2017, according to JLL’s U.S. Investment Outlook.

“The scale is way off right now, there’s so much investment-grade capital looking to get in on these deals, and there’s only a finite amount of assets out there,” NAI Partners Senior Vice President of Retail Jason Gaines said.

Investor Sentiment

Pricing for grocery-anchored retail centers continues to be aggressive because, with strong cash flow and rent growth, sellers have little incentive to sell. Even if the price is right, owners will still think twice before selling because redeploying the capital is not easy in today's market. 

"What do I do with the money? Where can I capitalize on that return? Those answers are difficult to get to," JLL Retail Vice President Randy Hopper said. "Grocery-anchored centers are still outperforming traditional power centers." 

Grocery construction has been on a tear as grocers fight for market share.

“National retailers will tell you Houston is one huge suburban market, that’s the way it's been for the past 20 years. That lends itself to suburban grocery-anchored centers, which is why you’ve seen those grocery-anchored centers be the bulwark of Houston real estate,” Hopper said.

But that is slowing down rapidly. New supermarket delivery fell to 1.2M SF in Texas in 2017, down from 3M SF in 2016. In 2016, Texas accounted for over 16% of total new grocery space, and Houston alone accounted for 9.2% of new national grocery product.

Though grocery-anchored centers are abundant, only a few are sold every year. 

“Houston’s a great example,” Stream Realty Retail Managing Director Ralph Tullier said. “In any one year, you might see five or so of these stores change hands, but there are hundreds of grocery-anchored retail centers across Houston. It’s an extremely tight market.”

Three prominent Houston-area grocery-anchored retail centers changed hands last year, and another one is on the selling block. LaSalle Investment Management acquired the fully leased 253K SF Costco-anchored Greenway Commons retail center at 3830 Richmond near Greenway Plaza. HFF worked with Westwood Financial Corp. to secure the sale of the Market At Lake Houston, a fully leased 101K SF H-E-B-anchored asset in Atascocita. Market Square at Eldridge, a Sam's Club-anchored center at 13331 Westheimer in West Houston also changed hands.

The fully leased H-E-B-anchored Tanglewood Court was just listed for sale.

“When you have centers like the ones we’re talking about, they are highly sought after. There are dozens of groups that want to look at that type of asset, so they’re pretty aggressively priced,” Tullier said.

Future Demand

Kroger Houston Retail

The grocery sector in the year ahead will be an eventful one. We expect increased competition from foreign chains and non-grocer domestic companies entering the space, which will spur major advancements in technology. Grocers will be changing the way consumers shop, interact with their brand and products,” JLL Senior Retail Research Analyst Taylor Coyne said.

“Grocers have spent real time and money to get their stores situated with e-commerce instead of against,” Gaines said.

Kroger recently announced Kroger Edge, which communicates with smartphones’ shopping lists to help guide customers to desired products. High-tech shelf displays will show pricing and nutritional information in 200 stores by the end of 2018.

H-E-B recently acquired Favor, an Austin-based delivery smartphone app, and has launched curbside pickup and home delivery services at half of its 85 Houston-area stores to date. 

Grocery construction is expected to stay lower than the past few years, but while grocers are taking a break on new store openings, investors’ hunger for grocery-anchored shopping centers is not satiated yet.

“The institutions who own these assets, they know what they’ve got,” Gaines said. “Right now, with such good cash flow and long-term financing, they’re not looking to sell. Even if the price is right, they can’t replace it. This will be a very aggressive seller's market for the foreseeable future.”