By Jim Costello on June 19th, 2017
When Whole Foods was king of the organic world, commercial real estate investors were willing to pay an outsized premium for grocery centers anchored by the retailer. In 2013, the average cap rate for grocery anchored centers nationally came in at 7.4% versus a 5.3% cap rate for Whole Foods anchored locations. This 190 bps spread narrowed as the fortunes of Whole Foods faded.
That spread shrank but never went away. Even into 2016 when the share price of Whole Foods was at a near-term low, grocery centers anchored by Whole Foods were able to obtain a 90 bps premium relative to other grocery centers. There were two factors driving the premium for Whole Foods anchored grocery centers: the halo effect of a leading tenant and the location premium for the assets.
Whole Foods has typically located stores in neighborhoods with high incomes and demographics favorable for the health conscious but on-the-go consumer. Investors paid more for grocery anchored centers in these locales as land prices were higher regardless of the tenant. That location value drove some of the decrease in cap rates for Whole Foods anchored centers into 2017 with more high-priced urban transactions.
What remains to be seen is if this premium for Amazon/Whole Foods anchored centers begins to grow once again. With the low interest rate environment expected to give way to higher rates, it is unlikely that Whole Foods anchored grocery centers will see renewed cap rate compression. This said, the strong balance sheet of Amazon plus whatever profit-making strategies Amazon has for these Whole Foods locations may polish that halo. Investors may once again put both a tenant and a location premium on these centers.