IRVINE, CA—The grocery industry continues to evolve as it responds to the changes in consumers’ demographic profiles and needs. This is evidenced by many national grocery stores going through consolidations and reinventions in response to competition from the ethnic operators as well as niche grocery operators such as Whole Foods, Trader Joe’s and value-oriented brands like Walmart. GlobeSt.com sat down with Donald MacLellan, senior managing partner with Faris Lee Investments, a retail property investment advisory firm that is advising owners of retail centers across the nation, about this trend.

GlobeSt.com: Is the thought of a grocery store going dark due to specific market forces something that keeps owners up at night?

Donald MacLellan: Yes, it certainly does worry owners, but it doesn’t have to. Owners have to be proactive in understanding the specific grocery store’s business plan and anticipate potential changes. An example over recent years has been the decision by Ralphs to close underperforming and/or non-profitable stores. The key for the owner is to confront these situations early in order to offer the grocery store rent incentives or the flexibility to convert to a stronger performing format such as Food 4 Less to better align with the local customer base. If, in spite of these concessions, the grocery store still goes dark, then the owner must look to other viable tenant uses in order to maintain the needed customer traffic for the overall success of the center.

GlobeSt.com: What types of tenants are filling this vacant store space?

MacLellan: It really depends on the market and its demographics. Many times an ethnic supermarket will come in and fill a demand that was not being met. We are also seeing local specialty grocers come into these spaces that are focused on a high level of service and quality of product. Consumers are looking to provide themselves and their families with natural and organic foods they feel good about even at a higher price point. On the other side of that, discount options are also a strong replacement for vacancy. Smart and Final, dollar stores such as 99 Cent Only, and Walmart Neighborhood Markets are growing in number and competing for space. Finally, for more regional-oriented centers, we have seen soft goods, home goods and other necessity-oriented retailers backfilling these grocery spaces. In certain circumstances where parking is abundant, we are seeing the larger fitness operators, and entertainment-oriented users.

GlobeSt.com: Over the past few months you have sold several properties with vacant anchor space. How do you approach your marketing program? 

MacLellan: With the market being as strong as it is, there is a large buyer pool ranging from private family offices to institutional funds including REITs, seeking value-add opportunities. But, these investors aren’t going to buy without a sound strategy for how to add value over their holding period.  In order to match the seller’s pricing needs with the investor’s required yield thresholds, we need to provide a strategic vision in a creative, yet data-based way. For example, we often work with architect and construction consultants to visually demonstrate potential redevelopment opportunities inherent in high vacancy centers, and enlist local leasing teams who can provide street-level tenant opportunities and leasing efforts. This and other upfront work is instrumental in orchestrating a successful closing.

GlobeSt.com: Can you provide an example?

MacLellan: Faris Lee recently completed the $29.35 million sale of Rosedale Village, a 222,000-square-foot community center in Bakersfield, CA. It had two dark anchors – Save Mart and Rite Aid. Rite Aid was subleasing to Dollar Tree. Through a high-level advisory approach, our goal was to showcase how to transform a B center with an A location into a first class center matching its excellent location. It is one of only two community centers that serves the northwest trade area of Bakersfield. While Bakersfield is not perceived as a core market, the city actually benefits from a strong oil and energy industry base driving jobs and investment comparable to cities like Austin and Houston. Educating potential investors about the market and the low big-box retail vacancy of just two percent, and employing a strong leasing team and architectural concepts, as well as other key strategies, provided an end result of attracting 12 highly qualified offers. Ultimately, by effectively demonstrating to potential investors how Rosedale Village presented a diamond in the rough value-add opportunity within the Southern California basin, we successfully executed a successful sale transaction.

Visit Faris Lee Investments at ICSC RECON in Las Vegas at Booth C150M.