4 grocery-anchored, value-add strategies

Written by Tyler Kastelberg

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Happy Sunday!

I recently had a great conversation with Matt Annibale, a Senior Director of Acquisitions at First National Realty Partners (FNRP). On top of sharing that FNRP has embraced a remote work policy for their 100+ employee team (which is fascinating in its own regard), Matt dove into the intricacies of their grocery-anchored retail platform in our Q&A below. 

… but before we get going, if someone forwarded this to you …

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Tyler: Why grocery-anchored retail?

Matt: The grocer is a staple in the community, and thus, grocery-anchored retail properties will always have value. Additionally, restaurants, barbershops, spas, and nail salons are some of many experiential-retail businesses that technology won’t be able to disrupt very easily. Those businesses need a home, and they love finding it next to grocery stores. 

T: What types of grocery-anchored are the most appealing?

M: Grade A grocery-anchored real estate in densely populated, high-income, growth markets. I look for centers that have the leading grocers in their markets. As a firm, FNRP wants to buy properties where we can increase value through leasing and that have the right market trends and demographics for long-term success.

T: What are common value-add strategies for grocery centers?

M: More often than not, the best way to add value is to increase occupancy. We look for centers that are between 85% and 90% leased. If there is a center with lower occupancy and a good reason … even better.

Unfortunately, many properties that hit the market today have high occupancy.

4 ways to add value to grocery-anchored retail properties:

  1. Improve occupancy.
  2. Develop and/or spin-off outparcels (they typically come with a better valuation than the center itself)
  3. Extend leases on current tenants (leads to cap rate compression)
  4. Capital improvements … repairing roofs, extending warranties, etc.

T: How are grocery-anchored valuations changing?

M: There was always value in the grocery-anchored space, but the cat is out of the bag since the pandemic. Investors who have been chasing yield in industrial and multifamily spaces are dipping over into grocery-anchored retail. The competitive landscape is much more difficult. There are more buyers and bidders than ever before.

High-quality, grocery-anchored product is pricing extremely aggressively. Compared to this time in 2021, cap rates have compressed 75-100 bps. The south and growth markets are the hottest places for grocery-anchored retail.

T: What is a red flag that makes a grocery-anchored property untouchable?

M: The biggest unforeseen deal killer is environmental. It is hard to account for until diligence, and if there is a large amount of contamination in the soil, it can be difficult to overcome. For example, a historic dry cleaner that dumped chemicals can be difficult to remediate.

Additionally, a co-tenancy clause or termination right that wasn’t revealed before diligence could derail a deal. However, in most cases, we’ll be able to navigate a lease issue with the seller.

T: Matt, how can the Bullpen community help you?

M: Send me deals! My work email is mannibale@fnrealtypartners.com. We have an exceptional close rate and highly value our relationship with sellers. 

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That’s all of this week! Let me know if you found this information interesting.

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