Ground-Floor Grocers Pay Off as an Amenity

More than one study has shown the impact a Whole Foods store can have on a neighborhood. But can other grocery chains have a similar effect? Yes, but not as much, according to a new report from RCLCO.

The Bethesda, Md.-based realty advisory firm first studied what it calls the “Premium Grocer Effect” in 2016, when it found that apartment developments with a Whole Foods earned a rental premium of 4.3 percent. But since then, the high-end food store market has changed significantly.

In its latest study, the firm found that apartment communities with a Whole Foods on the ground floor achieve, on average, a rental premium of 5.8 percent above comparable properties in the immediate local area. That’s an increase of 1.5 percentage points in four years.

The same 5.8 percent premium now holds true for a Trader Joe’s. But in its previous report, RCLCO found that Trader’s only earned a 3.2 percent bounty.

Other premium grocers—brands such as Sprouts Farmers Market, Fresh Thyme, Harris Teeter, Fairway Market and Safeway—drive a smaller “but still meaningful” premium of roughly 3.3 percent, according to the study. These chains were not included in the 2016 study.

“The emergence of other premium grocers with a similar orientation—but less established brand power—as Whole Foods and Trader Joe’s shows that other brands are also able to capitalize on this trend, conferring a smaller, but still substantial, premium to rental rates in the communities within which they are located,” the study said.

Research from Newmark Knight Frank, a commercial real estate advisory firm, covering just the Washington, D.C. region found an even greater impact.

Grocery-anchored apartment properties in the NKF study enjoyed a 23.4 percent rent premium over their submarket average before and upon the store opening for business. “Just the announcement of a new grocery store opening in the future appears to have an impact,” the firm said in its May 2019 report.

Moreover, the study found that in the year after opening, properties with a grocery store still compelled a 13.7 percent rent premium over other apartments within a half-mile radius.

Other studies, meanwhile, have shown that even housing values are higher in communities near Whole Foods and Trader Joe’s—even ALDI’s, the German-based chain.

The latest RCLCO report shows how major brand name grocers have functioned “as an unmistakable cultural signifier, reflecting an area’s affluence, lifestyle preferences and evolution,” according to the study’s authors, Managing Director Derek Wyatt and Vice President Vahe Avagyan. Intern Nicholas Stefanoni also is cited as an author.

But they do more for apartment properties than the ability to command higher rents, according to the study. While there is no guarantee, those with the highest rent premiums also sometimes experience the strongest rent growth.

In comparing the relationship of the two—rent premiums and rent growth—RCLCO found that between 2018 and 2019, Whole Foods properties which nailed the highest premiums also had the strongest rent growth. But those projects with a Trader Joe’s experienced a flat relationship.

Just as important, perhaps, the presence of premium rents does not slow absorption rates. In many cases, the study discovered, such properties often capture more than their fair share of the market.

Profiling eight of its case studies with ground-floor premium grocers, RCLCO found that new buildings can expect to lease up units at the same pace as other properties—and “frequently above” that pace. “When these grocer-anchored buildings first open, their capture rates tend to exceed their fair share of sub-market demand, but stabilize to approximately fair share levels over time,” the report said.

The authors concluded the presence of a ground-floor premium grocery store “has a meaningful impact” on performance. “Brand cachet, particularly among Millennials who have been the primary target market for most new apartment buildings, is clearly important.”

For the new study, RCLCO analyzed 64 apartment communities across 20 different MSAs, each of which contain a premium grocer on the ground-floor. To determine rental premiums, it analyzed 31 apartment communities with a ground-floor Whole Foods tenant, 15 with Trader Joe’s and 18 with another premium grocers located in 20 different MSA’s and 50 submarkets throughout the country.