April 12, 2019

Grocery Store Openings Skyrocket As Other Retailers Close

As department stores like Sears and specialty retailers like Toys ‘R’ Us wind down operations, U.S. grocers are adding outlets and space while some chains launch new concepts.

Grocery store openings paced by Publix and Aldi jumped 29.4% last year, adding more than 17 million square feet of space in stores across the country, according to the U.S. Grocery Tracker 2019 report from global real estate services firm JLL, formerly known as Jones Lang LaSalle.

Contributing to the large increase is the expansion strategy of grocery chains after they paused in previous years to contemplate the next growth wave, JLL Retail Research Manager Taylor Coyne said in an interview.

“People were being a little more tailored in their expansions in 2017,” Coyne said. “Confidence was back up in 2018.”

Grocery chains such as Publix, Giant Food, Meijer and Aldi are opening new stores, some with smaller formats, as department and specialty store chains such as Sears shutter locations. In 2008, nearly 5,000 store closings were announced, according to consumer expert and radio host Clark Howard. However, Whole Foods Market — owned by Amazon — is considering converting all its 365 locations, which are smaller and less expensive than a standard store, to Whole Foods outlets.

Planning on the part of grocers paid off as chains such as Aldi experienced “immediate success” after entering new markets last year, JLL’s Coyne said.

The most grocery store openings took place in the three most populous states in the country: California, Texas and Florida.

Fueled by Publix Super Markets’ aggressive expansion, Florida accounted for 9.71% of the grocery space that opened in 2018 and ranked No. 1 for states in that category, according to the JLL Grocery Tracker. Publix, the largest private employer in Florida, also plans to expand its Lakeland, Florida headquarteres, campus by 190,000 square feet to accommodate its strong growth.

California and Texas tied for second-most new grocery space, with 7.83% each. Texas also benefited from Aldi’s expansion, as well as Kroger and the state-favorite H-E-B, while California growth was boosted by Sprouts Farmers Market and Aldi expansions, as well as Grocery Outlet and Smart & Final, the JLL report states.

On the investment side, sales of grocery-anchored centers were a bright spot, despite volume dropping to $9.9 billion in 2018 as buyers became pickier and targeted top performers, according to the JLL Grocery Tracker.

Sales of grocery-anchored centers were “down significantly year-over-year,” but the 2017 total was not available for comparison, JLL said. Sales of grocery-anchored centers increased more than 5% in 2017 but an exact sales figure was not provided, according to JLL.

“Investor appetite for grocery product remains elevated, with top grocery seeing aggressive pricing,” the report states. “Investors are looking for retail sectors that are reinventing themselves to stay ahead of changing consumer preferences, and grocery fits that criteria.”

Mark Joines, a senior managing director in Newmark Knight Frank’s Atlanta office who specializes in marketing grocery-anchored properties for sale, agreed that top-tier centers are hogging investor’s attention.

“It’s a story of the haves and the have-nots,” Joines said in an interview. “With institutional investors, their sweet spot has gotten much smaller.”

Major investors such as pension funds and insurance companies seek well-located centers anchored by a top grocery chain in a high-growth area, Joines said. That’s why Florida and other southeastern states continue to see increased interest from investors and building by developers, he said.

Tighter underwriting standards required by lenders also slowed the rate at which sales of grocery properties sold, according to JLL. Lack of availability of trophy grocery properties also played a role, partly because so many recently had traded hands, JLL said.

The dearth of quality assets coming to market will deepen as Publix buys its own stores and Kroger develops its larger stores, meaning fewer new centers will be sold to investors, Joines said.

However, the lack of top-tier grocery centers on the market helped push pricing higher, according to JLL. The average price per square foot paid for a single-asset grocery-anchored center increased 7.8% overall and 9.5% in primary markets over the past two years, JLL said.

“It goes back to the story of the well-performing assets,” JLL’s Coyne said. “They’re becoming increasingly valuable.”

Pricing should remain strong for trophy centers anchored by a strong brand and that are part of their community, such as the Safeway-anchored Diamond Heights Shopping Center in San Francisco, according to the JLL report. Diamond Heights fetched a price of $635 per square foot , the JLL report said.

“We anticipate an uptick in these types of deals in 2019 as [real estate investment trusts] continue to dispose of some neighborhood and community centers,” the Grocery Tracker said.