A Bright Spot in the Current Retail Environment: Grocery Stores
No matter how dire the economy, people have to eat. This obvious statement has led to the real estate truism that grocery-anchored shopping centers hold up relatively well in a recession. Whether it seems trite or not, this is proving accurate in the current weak economy.
While retail segments such as malls and luxury stores are struggling, merchants in strip centers with grocery stores are benefiting from customers who come to buy food.
The relative strength of this sector was demonstrated in late May. A group of investors led by principals from Lane4 Property Group (based in St. Louis, MO) paid $62.1 million for three shopping centers in suburban Kansas City. The deal, which includes debt, was done at an attractive price, despite there being six bidders. The capitalization rate (which equals the building’s net income divided by the price paid) works out at about 8.7%, based on operating income of approximately $5.4 million per year.
Jeff Berg, a senior vice president of Lane4, estimates that similar properties would have traded for a cap rate of around 6% two years ago. It is also significant that the buyers secured financing, despite today’s tight lending market. Financing resources clearly view this segment as being less risky than other retail formats.
Owners of grocery-anchored shopping centers are not immune from the difficult environment, however. As their budgets have tightened, consumers are choosing lower-cost grocery items. In the first quarter of 2009, the dollar volume of sales at U.S. grocery-anchored retail centers valued at $1 million or more fell a dramatic 39%, to $352 million from an estimated $581 million in the same period of 2008, according to Marcus & Millichap Real Estate Investment Services.
At the same time, wholesale clubs have been able to increase their market share in high-margin grocery areas, such as paper goods. Finally, what holds true for other retailers is seen by owners of grocery-anchored strips: Lessees are requesting rent concessions, and many smaller retail occupants have gone out of business.
The contrast becomes clearer, however, when the year-over-year decline for grocery-anchored centers is compared to that of all retail properties. The latter fell by 71% to $2.9 billion in the first quarter, states Bernard Haddigan, managing director of national retail for Marcus & Millichap. “Relatively, grocery-anchored centers are doing better,” he says. “The capital markets are going toward safer bets, and the safer bets are necessity-based retail.” This article is a summary of one written by Maura Webber Sadovi and published in the Wall Street Journal on June 3, 2009.
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Craig Higdon has over 16 years experience in financing commercial loans, small business loans, construction loans, and land loans. He owns Excelsion Mortgage, a commercial mortgage direct lender offering a wide range of commercial lending resources to investors and commercial real estate service providers.
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