Cypress Shopping Center

VIRGINIA BEACH, VA–The retail sector's problems are well known by this point: online competition, too many brick-and-mortar locations and rapidly-changing consumer tastes have all done their part to erode the earnings of department stores, clothing stores and even some luxury brands.

Now there are signs that a similar consolidation — a kinder word to describe what it happening — may be underway in the grocery store sector. Like the legacy retail REITs that have been scrambling to realign their tenant mixes in response to these trends, REITs with holdings in the grocery-anchored space are now beginning to restrategize as well.

One recent example is the locally-based Wheeler REIT, which has announced that it will be developing a strategic plan for the forthcoming anchor vacancies at Shoppes at Myrtle Park and Cypress Shopping Center, both in South Carolina. They are among the neighborhood centers affected by the recently announced BI-LO grocery store closures.

“We are confident that there are attractive, beneficial uses for both of these locations with regional and national tenants,” says CEO Jon Wheeler in a prepared statement. “Options include grocery and non-grocery retailers currently not represented in these particular submarkets who have expressed interest in the trade areas,” he says.

Bi-Lo is part of Southeastern Grocers, which recently announced a total of 20 stores closing across its brands, which also include Winn-Dixie, Harvey's and Fresco y Mas. Six of the Bi-Los closures will be in South Carolina, according to press accounts.

Over-Retailed, New Competition And The Threat Of Online

But the grocery-store sector is experiencing more than just the closure of underperforming locations. A case can be made that the grocery-store sector is also over-retailed — especially when you take into account the non-traditional stores that have begun selling food, such as the Dollar stores, the grab-and-go options at drugstores, and Target. Also, retailers such as Wal-Mart have been increasing the quality of their grocery store offerings, such as its organic produce.

To top it all off, new competition will be entering the market soon — the German grocer Lidl is expected to enter the US soon with some 100 new stores. One will be located in Brandywine, Md., for example, at TripleStone Real Estate's 15-acre master planned Cadillac Crossing, which just broke ground.

And then there is Amazon, which continues to innovate in order to make inroads into the grocery market.

Location, Location

For all the change underway, the one element that cannot be disrupted by technology or competition is location.

One of the largest deals in this sector occurred last year with the announced merger between Regency Centers and Equity One. The combined REIT — the deal closed March 1 — has a portfolio of primarily grocery-anchored properties that number about 429.

At the end of this quarter Regency Centers reported its portfolio was 96% leased and producing over 3.5% same property NOI growth. During the earnings call CEO Hap Stein spoke about the upheaval in the industry — and what he perceived to be the REIT's safety net.

The vast majority of our threat comes from best-in-class, local, regional and national tenants that offer a durable combination of convenience, necessity, service, value and better shopping experiences. When disruption causes retailers in our portfolio to rationalize their store count, we have often found that our locations are must-keep or if the user vacates, bad news is typically good news as we are able to attract a better user at higher rents.

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Cypress Shopping Center

VIRGINIA BEACH, VA–The retail sector's problems are well known by this point: online competition, too many brick-and-mortar locations and rapidly-changing consumer tastes have all done their part to erode the earnings of department stores, clothing stores and even some luxury brands.

Now there are signs that a similar consolidation — a kinder word to describe what it happening — may be underway in the grocery store sector. Like the legacy retail REITs that have been scrambling to realign their tenant mixes in response to these trends, REITs with holdings in the grocery-anchored space are now beginning to restrategize as well.

One recent example is the locally-based Wheeler REIT, which has announced that it will be developing a strategic plan for the forthcoming anchor vacancies at Shoppes at Myrtle Park and Cypress Shopping Center, both in South Carolina. They are among the neighborhood centers affected by the recently announced BI-LO grocery store closures.

“We are confident that there are attractive, beneficial uses for both of these locations with regional and national tenants,” says CEO Jon Wheeler in a prepared statement. “Options include grocery and non-grocery retailers currently not represented in these particular submarkets who have expressed interest in the trade areas,” he says.

Bi-Lo is part of Southeastern Grocers, which recently announced a total of 20 stores closing across its brands, which also include Winn-Dixie, Harvey's and Fresco y Mas. Six of the Bi-Los closures will be in South Carolina, according to press accounts.

Over-Retailed, New Competition And The Threat Of Online

But the grocery-store sector is experiencing more than just the closure of underperforming locations. A case can be made that the grocery-store sector is also over-retailed — especially when you take into account the non-traditional stores that have begun selling food, such as the Dollar stores, the grab-and-go options at drugstores, and Target. Also, retailers such as Wal-Mart have been increasing the quality of their grocery store offerings, such as its organic produce.

To top it all off, new competition will be entering the market soon — the German grocer Lidl is expected to enter the US soon with some 100 new stores. One will be located in Brandywine, Md., for example, at TripleStone Real Estate's 15-acre master planned Cadillac Crossing, which just broke ground.

And then there is Amazon, which continues to innovate in order to make inroads into the grocery market.

Location, Location

For all the change underway, the one element that cannot be disrupted by technology or competition is location.

One of the largest deals in this sector occurred last year with the announced merger between Regency Centers and Equity One. The combined REIT — the deal closed March 1 — has a portfolio of primarily grocery-anchored properties that number about 429.

At the end of this quarter Regency Centers reported its portfolio was 96% leased and producing over 3.5% same property NOI growth. During the earnings call CEO Hap Stein spoke about the upheaval in the industry — and what he perceived to be the REIT's safety net.

The vast majority of our threat comes from best-in-class, local, regional and national tenants that offer a durable combination of convenience, necessity, service, value and better shopping experiences. When disruption causes retailers in our portfolio to rationalize their store count, we have often found that our locations are must-keep or if the user vacates, bad news is typically good news as we are able to attract a better user at higher rents.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.