Grocery-Anchored Retail Metamorphis

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The grocery industry is going through a metamorphosis.  Many consider the industry immune to the online shopping trend.  That is until COVID-19 consumed the world.  Grocery-anchored retail is experiencing a new direction not seen before.

Retail-Industrial Conversion

In July of this year, CBRE took an in-depth look at the retail to industrial conversion across the country. This report’s central thesis explained that 13.8 million square feet of United States retail space has been converted to 15.5 million square feet of industrial space. But that is not solely a COVID-19 happening, as that data goes back to 2017, according to CBRE. In the report, they state Retail-to-industrial property conversions are accelerating across the U.S., driven by the growth of e-commerce. There are currently 59 such projects that have either been completed, proposed, or are underway since 2017—up from 24 in January 2019, according to the CBRE Research survey.

Grocery-Anchored Retail Metamorphosis

This requires changes in the grocery-anchored retail center. The shift to online grocery shopping has prompted retailers to re-think the use of their space. The need for a streamlined layout for efficient shopping and staff to pull orders placed online for pickup is vastly different than the experiential layout required to encourage browsing and impulse buys. Kroger saw a 92% increase in online orders in the first quarter. Walmart reports a 74% jump in e-commerce sales. Albertsons 400 stores reported a 276% leap in the same time frame. Earlier this year, Kroger began testing a pick-up only store in the Cincinnati area. Pittsburg’s Giant Eagle converted two of it’s stores to pick-up only.

This does not bode well for the small storefronts in these same retail centers. With the loss of foot traffic to the center, many are finding they can’t survive. This frees up even more space in the shopping center for an industrial conversion.

Will the Trend Continue

Prices will determine whether or not this grocery-anchored metamorphosis continues to rise. Industrial rents run approximately 25-30% below asking rents for retail. Developers will want below market pricing before purchasing these properties for industrial conversion. With tenants defaulting at an alarming rate, will owners be desperate enough to sell at these discounted prices?

A newly constructed grocery-anchored retail center will typically allocate 7,000 to 10,000 square feet for small tenant occupancy. This is dramatically different form older centers that often allowed 20,000 to 30,000 square feet for this purpose.

May is typically the busiest listing month of the year for grocery-anchored real estate. In May 2019, 117 such properties came to market. The year before it was 115 listings. This year, 23 properties were listed for sale, according to GroceryAnchored.com data.

Time will reveal which, if any, of these changes remain permanent. Voorhees, the CBRE vice chairman stated recently “It’s all changing so fast. It’s like we’re so close to the blast, our ears are still ringing.”

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