Multifamily Projects Realize Rent Premium With Ground Floor Grocery Stores

Multifamily developers can extract a rent premium from their residents by building an upscale grocery store into an apartment project, or replacing an aging supermarket with new multifamily housing that includes the rebuilt and updated grocery on the ground floor, according to the real estate consulting firm RCLCO.

“Apartment communities with a Whole Foods on the ground floor achieve, on average, a rental rate premium of 6%” compared to similar communities nearby, an analysis by RCLCO calculated. For a Trader Joe’s on the ground floor, the average premium was 5.6%. Other high-end grocers like Sprouts, Harris Teeter, Fairway and Safeway yielded premiums of 5.2% in 2023, up from 3.3% in 2020.

“These premiums have held relatively consistent over the past years in the face of a tumultuous multifamily market, where skyrocketing rents in 2021 yielded to flat or declining rents in 2023,” the company stated.

Higher value developments that incorporate ground-floor grocery stores can eliminate the inefficient use of land by sprawling, low-density stores in central locations that no longer represent the highest and best use of a desirable site, it noted. “RCLCO’s research demonstrates the meaningful competitive advantages that these projects gain over nearby competitors.”

The opportunities are enormous. “In North America, there are nearly 140,000 neighborhood and community centers, comprising a total of 4.4 billion square feet of retail space, according to CoStar. Of these, around 8,350 properties are listed as anchored by a supermarket, featuring nearly 700 million square feet total at an average rentable building area of 83,500 square feet per retail center. Approximately 75% of the supermarket-anchored centers were built before 2000,” the report said.

The report cited examples of developers and grocers that are already partnering to redevelop existing groceries into multifamily housing. A recent example is a deal struck by the developer Related California and the Vons supermarket owned by Albertsons in Santa Monica, CA. The project is backed by $385 million in construction financing from Bank of America.

The eight-story, 600,000 SF project, at 710 Broadway, will include 280 rental apartments, of which 30% will be reserved for low and middle-income households, a 30,000 SF park, 34,000 SF of retail, and a 53,500 SF state-of-the-art Vons urban market. Completion is expected in 2025.

Washington, DC, saw its first such project in 2013 when developer Foulger-Pratt collaborated with Albertsons to build The Exchange. The project replaced a small, aging Safeway store with a 17-story mixed-use development with 486 rental units and an expanded 58,000 SF Safeway, all adjacent to a Metro station. The two companies followed up in 2020 with Beckert’s Park, a similar mixed-use development that “marks the significant value transformation of a prime, urban site in Washington, DC,” RCLCO noted.

Kimco Realty, a REIT focused on grocery-anchored shopping centers, has also been active in this space, according to RCLCO, with high profile projects at the Pentagon Centre in Virginia, Lincoln Square in Philadelphia, and the River Oaks Shopping Center in Houston.

“Kimco is a compelling case study for building a company strategy around the evolution of shopping centers into dynamic, mixed-use hubs, integrating housing and grocery anchors, in response to shifting consumer preferences,” RCLCO stated.