Monday Morning Scoop - Grocery-Anchored Retail Has Another Record Year
Grocery-Anchored Retail Has Another Record Year
2022 was a “tail of two halves” for the grocery-anchored retail sector, which began the year with red-hot momentum from record transaction volume in 2021 and the tremendous cap-rate compression of cheap debt.
An average monthly transaction velocity of $1.5B for grocery-anchored retail assets in H1 2022 reflected this Big Mo.
However, the track record for H2 2022 reflected the impact of the Fed’s campaign to raise the cost of debt: the monthly transaction activity average was nearly sliced in half, to $852M, as cap rates surged to current levels of more than 7%.
Nevertheless, the good half outweighed the bad half—grocery-anchored retail notched its second consecutive record year in 2022 with $14.7B in total transaction volume, an increase of nearly 16% over 2021, according to JLL’s just-released annual US Grocery Tracker Report.
After plunging from a pandemic-inflated 56% of US grocery sales in 2020 to 11.3% in 2021, the e-commerce share of grocery sales resumed its pre-pandemic trajectory in 2022 at 15.8%, about $161B. JLL is projecting that the e-commerce share of grocery sales will hover at around 15% through 2026.
While establishing and expanding their own proprietary online platforms, major grocery chains in 2022 also reduced their reliance on marketplace companies and e-commerce providers like Instacart, DoorDash and Uber Eats.
JLL’s report said what appeared to be an emerging subsector of the grocery retail market at the end of last year, startups like Gopuff, Buyk and Fridge No more that promised 15-minute grocery deliveries from micro-warehouses—a concept that attracted significant venture capital last year—appears to have fizzled, with Buyk filing for Chapter 11 bankruptcy.
In terms of their retail footprints, H-E-B and Publix were the fastest growing grocery chains in 2022, adding 1.2M SF and 1.8M SF, respectively.
Because there was less cushion between grocery-anchored asset pricing and interest rates at the beginning of the year, the grocery-sector was the first retail subtype to feel the full impact of rate hikes, JLL said.
“Over the course of 2022, going-in yields on multitenant grocery centers expanded nearly 100 basis points (bps) from a historically low average of 5.9 percent in Q1. In comparison, cap rates on non-grocery-anchored retail only increased by an average of 80 bps from peak pricing,” JLL’s report said.
Noting that “not all grocery-anchored retail is created equal,” the Grocery Tracker report said transaction yields varied not only by region—the Midwest saw the highest returns—but by which grocery chain was anchoring the shopping centers: centers anchored by Whole Foods stores had the most aggressive pricing, averaging a 4.9% cap rate, followed by Sprouts and Publix, which traded about 80 bps wider on average.
While private capital remained the largest active player in the grocery-anchored sector, a surge in large portfolio transactions by institutional investors reduce private capital’s share of the deals to 55%, the lowest level in five years, JLL said.
Large deals by institutional investors in 2022 included DRA Advisors’ acquisition of a 33-asset grocery portfolio from Cedar Realty Trust ($870 million), EDENS’ purchase of the Donahue Schriber portfolio on the West Coast ($500 million, nine assets) and TA Realty’s acquisition of the Gravestar Northeast grocery portfolio ($390 million, eight assets).
JLL is projecting that the average deal size in the grocery-anchored sector will come down in 2023 due to the difficulty of financing large transactions in the current lending environment.
By: Jack Rogers