Grocery-Anchored Retail Centers Boom Amid Investor Food Fight, New Appetite From Surprising Tenants

Despite early pandemic fears about the future of brick-and-mortar retail, everyone still had to eat. So it wasn’t exactly surprising that even through the strictest lockdowns, grocery-anchored retail proved almost crisis-proof. 

But now, two years after the start of the coronavirus outbreak, the feeding frenzy is only intensifying as institutional investors vie to pick up safe bets to mitigate rampant inflation and benefit from surging rents, and traditional mall retailers like Sephora begin thinking outside the box to consider spaces in grocery-anchored properties.

"If I never worked on anything but grocery-anchored centers again, it would be a great way to end a career," JLL Retail Group Senior Managing Director Barry Brown said. "It's a very liquid asset class, and there's a very broad investor appetite for it, really more so than other product verticals within the retail space."

Crexi, a real estate listing site, says shopping center transactions grew a whopping 56% in the first quarter of 2022, while JLL reports more than half of all retail transactions were grocery-anchored in 2021 after making up only about a third in 2019. In all, 735 grocery-oriented shopping centers changed hands last year, according to JLL’s Grocery Tracker 2022 report, representing $13.3B in sales and the second-highest volume in the space in recorded history.

Grocery-anchored retail has never been unpopular and has remained e-commerce-proof, several retail experts told Bisnow. But after years of steady growth, sales have boomed in recent months, with the model proving a no-brainer investment choice. Private capital is the largest buyer of grocery-anchored retail, JLL states, at more than two-thirds of the market. But public REITs are also spending more year-over-year on grocery-anchored retail, making up 17% of buyers last year versus 9.8% in 2020.

"There's a lot of capital flight to safety right now,” Crexi Chief Strategy Officer Eli Randel told Bisnow. “Our first-rate tenants tended to be healthy throughout the pandemic. Some retailers were forced to close, [but] grocery tenants were typically still open. They tend to represent healthy centers, for the most part, depending on the grocer."

These centers, which bank on the foot traffic flowing out of, say, a Kroger or Albertsons and into surrounding boutiques and restaurants, can be much more than strip malls — and just the past several months illustrate the voraciousness of investor appetite.

In the Dallas-Fort Worth suburb of  Allen, Texas, a partnership of Dallas companies Charter Holdings and DuWest Realty snatched up a sprawling 458K SF retail and office property, Watters Creek at Montgomery Farms, for an undisclosed price. JLL began marketing the Market Street-anchored property, which it called one of the top shopping centers in DFW, around the middle of last summer and the deal was closed in March, Brown said.

For other recent deals around the country, the story is fairly similar: several months of straightforward marketing followed by a quick sale. In Chicago, Mid-America Real Estate Group brokered two shopping centers: Elmhurst Crossing, which is partially anchored by a Whole Foods, as well as North Riverside Plaza, which will be partially anchored by an Amazon Fresh when that opens in May. Both properties, which together are about 732K SF, had been owned for decades by a Montreal family-owned company, Federal Construction.

Both properties went to market in November 2021, and with some holiday delay, sold soon after for what could be as much as a combined $158M. With other anchors at the properties including large retailers Kohl's, Petco and At Home, there was a lot of interest, according to Ben Wineman, principal and managing broker at Mid-America, who brokered the properties along with associate Kathryn Sugrue. 

"They tore down and redeveloped most of Elmhurst Crossing around 2000. But they'd owned these properties forever," Wineman said. "[Properties] are being snatched up quickly."

Investment firm Brixmor Property Group bought both properties, following the trend of a lot of real estate being bought by institutional investors.

"A big glut of that capital looking to get placed is institutional capital,” Randel said. “You're certainly seeing some of the institutions pursue grocery-anchored centers and other credit-backed retail properties.”

Amid rising inflation and interest rates, Brown says investors are hungry for relatively safe, necessity retailers like grocery. Those centers anchored by grocers that are No. 1 or No. 2 in a market are faring best, though third- or fourth-ranked grocers, grocers targeting lower-income markets and those providing international fare are still enjoying strong sales, according to Brown, even without bells and whistles like curbside delivery.

Grocery-anchored retail is seeing the same flight to quality as other real estate asset classes, Randel said, but Class-B and Class-C properties still see new buyers that want to dig in and renovate them.

"They want to get their hands around their property, whereas some of the quality stuff is a little more of a passive ownership style,” he said. “Perhaps it's where it separates the high net worth individual trying to achieve some passive yields with a property they can point to and be proud of, versus an old-school, gritty, value-add commercial real estate operator. There's demand for both, in my opinion, not always the same buyer."

The safety in grocery-anchored retail lies in the nature of the type of shoppers it attracts and the fact it is one of the few retail types customers will visit consistently and frequently. When a customer darts in for a few items four times a week, it creates better visibility for the other stores in the center. Neighboring stores, such as appealing quick-service restaurants for a lunchtime bite or coffee shops for a morning pick-me-up, tend to benefit mightily from shared foot traffic, Colliers National Retail Director Anjee Solanki said.

"A lot of the other uses are synergistic with grocery,” Solanki said. “There's a lot of opportunities [that] pay off.”

Though grocery always held its own through the pandemic, a return to more normalcy has only seen unique visits grow, Solanski said, citing the example of two real grocery stores of the same brand in Chattanooga, Tennessee, and San Diego.

The Tennessee store, in an area that saw strict Covid-19 restrictions, counted 7,000 unique visitors in August 2020. In August 2021, that figure jumped to 58,000. By March 2022, the figure was 73,000. The San Diego store saw a similar jump in foot traffic: from 26,000 visits in April 2020, to 67,000 in April 2021, to 105,000 in March 2022.

Numbers like that are paying off in unexpected ways.

"We're now seeing brands that you typically may see in a mall want to be in a grocery-anchored lifestyle center," Solanki said. "It's really critical, because grocery can add so many different [stock keeping units], and also customize to the community."

For example, she said, one Austin Whole Foods offers in-house cooks, who grab produce off the shelves to cook for people ordering a meal with a glass of wine at a seating area in the middle of the store. Other communities are filled with more busy professionals and offer larger varieties of prepared food. Family-oriented areas offer options for home cooking.

That ability to cater to a specific community of shoppers has led brands that may have previously targeted a mall for new stores, such as Sephora or Crate & Barrel, to now target grocery-anchored retail.

Grocery stores are also, to a certain extent, resistant to the dreaded brick-and-mortar killer: e-commerce. Grocery stores have ramped up curbside and delivery output since the beginning of the coronavirus pandemic, but few believe the brick-and-mortar grocery store will ever go completely out of fashion. Solanki said most customers typically have two regular grocery stores, one for bulk staples, like a Costco or Walmart, and one for smaller quantities of specialty goods, like a Whole Foods.

"I'm going to go in, and I want to touch, feel, smell, make sure my mushrooms aren't discolored, my avocado is not overripe," Solanki said. "But there are moments where I know, hey, I need my spaghetti, my milk, my oatmeal, my butter, that I can order and then pull up to curbside and have them put in the back of my car, because I have to go and rush and pick my parents up from the airport."

Solanki said she is continually musing over the future of grocery retail, which brand will capture which market share and how stores will reinvent themselves to stay relevant, bringing up the example of many diving into healthcare, personal care and wellness items.

"It's going to be really interesting to see going forward. Pre-pandemic, we started seeing some researchers looking at, can we add cooking concepts within our stores?" Solanki said. "It's a heavy lift in terms of cost, but we also have to keep in mind, a lot of the grocery stores are getting pinched normally with inflation, but supply labor costs, et cetera, keep eating up their margins."

Brown agrees.

"They're learning from each other. They all had to adapt or die," Brown said. "They've done a good job of it."

Randel predicts red-hot sales could cool in a little over a year, but only "around the edges" and not significantly. But Brown and Wineman are less convinced the trend will slow at all.

"Buyer demand in equity flows for retail real estate continues to be very strong as we begin 2022," Wineman said. "Certainly, we've all watched headwinds in the greater economy between inflation and the interest rate hikes that we've seen, let alone geopolitical events. We'll all have to wait and watch."

Solanki gives a time frame on waiting and watching, estimating that the industry will have a better idea in the third or fourth quarter of 2022 of how the global whirlwind of war in Ukraine, inflation, supply chain delays and new Covid-19 variants will affect retail.

“We’re really managing and watching this in the short term. I think we’ll see REITs and landlords be OK,” she said. “There’s so many unforeseen circumstances at the macro level. … It’s going to be really interesting to see what transpires over time.”