Valuing Whole Foods Stores After The $13.7B Amazon Deal

Whole Foods’ sales per square foot hover around $880 per year, one of the highest in the retail industry. By 2021, Amazon will account for 50% of all online sales. Put these two giants together and the real estate implications are compelling. 

Before Amazon announced it would buy the grocer for $13.7B, Whole Foods stock had slumped. Produce prices for all grocers have been increasing, causing less brand loyalty and more price sensitivity, Quantum Real Estate Advisors President Chad Firsel said. When Whole Foods co-CEO Walter Robb walked away from the helm in November 2016, leaving founder John Mackey as the sole CEO, many investors got nervous. 

On June 16, the date the merger was announced, prices went from $33.06/share to $41.99/share — becoming about 30% more valuable overnight — and have remained around that price since.

How does that translate to property value? 

Unlike commodities markets, real estate assets do not see immediate increases and decreases in valuation based on real-time information, Colliers International Vice President Tom Nelson said.

“Whole Foods had really been under a lot of scrutiny from activist investors calling for change. Stock prices were impacted, but cap rates weren’t changing, and centers are still highly valued on cap rates,” Nelson said.

“The proposed acquisition by Amazon eliminates any near-term uncertainty and improves Whole Foods’ credit rating,” HFF Senior Managing Director and Retail Practice Group co-head Danny Finkle said. “By virtue of greater investor demand for Whole Foods’ centers, we expect the acquisition market to become more competitive and drive pricing.”

The Amazon announcement has allowed investors to bid and price more confidently, he said.

Morningstar Credit Ratings Senior Vice President Edward Dittmer does not think a real estate investor would pay more for a property because of the higher-than-usual stock price of a tenant.

“Even if an investor pays more for a given property for [a] potential upside in cash flow, that upside isn’t really generated by the stock price. It would be more of a function of Whole Foods sales and the traffic that a particular store can generate now that Amazon is the new parent,” he said. 

Firsel has not seen any major fluctuations in cap rates since the announcement. 

“We see cap rates stabilized and in a plateaued place without additional cap rate compression. We haven’t seen a premium on [Whole Foods] deals, but the [Amazon acquisition] hasn’t closed yet,” he said.

It is still too soon to tell long-term valuations of Whole Foods properties. HFF arranged $30M in financing for a Whole Foods-anchored center in Birmingham, Alabama, a day before the Amazon announcement. No Whole Foods centers have traded hands since (or at least, no other trades have been made public) to compare pricing. 

Firsel said valuations could increase, but it largely depends on how the acquisition plays out. 

Though Mackey and the brand’s name will remain, some think an Amazon takeover would make Whole Foods-anchored centers more valuable. If Whole Foods started operating as brick-and-mortar Amazon stores, they could pull from more demographics, getting more traffic and therefore more value for property owners.

“If Whole Foods is run as a subsidiary of Amazon, I don’t see a big delta in valuations,” Firsel said. “But if [Whole Foods] is absorbed and run by Amazon, Amazon will commit to that site and potentially do some blend-and-extends, and valuation will go up.”

A blend-and-extend lease typically involves a landlord putting in additional tenant improvement or capital dollars in exchange for a longer lease term. Landlords may offer to cover the cost of upgrading a property’s fiber capabilities or add smart shelving to keep the tenant on longer.

Until the deal is closed, many landlords are in wait-and-see — but largely optimistic — mode. 

Morgan’s Pearl Midtown mixed-use development in Houston has a 264-unit apartment complex anchored by a 40K SF Whole Foods. Residents access the grocery store through a residential elevator that opens directly into the store.

“In today’s ever-changing environment where convenience and technology are at the forefront, this partnership should only enhance the experience of our residents,” Morgan Development Vice President Philip Morgan said. Morgan said he is excited to see what changes will be implemented into Whole Foods’ stores. 

Firsel thinks the merger is positive for the industry.

“This is a testament to brick-and-mortar retail. Why is the largest e-commerce company in the world interested in brick-and-mortar? They believe in omnichannel retailing,” Firsel said.

CORRECTION, JULY 18, 8:08 A.M. ET: An earlier version of this story reported Whole Foods' sales are $880/SF each week. It sells $880/SF each year.