Investors haven’t found much to love in the retail sector during the COVID-19 pandemic. There’s an exception, though: grocery-anchored retail.
Grocery stores have remained essential businesses during the pandemic. During the earliest days of COVID-19, they were some of the busiest places in the United States as restaurants shut down to in-person dining, gyms closed, movie theaters went dark and other retailers shut their doors.
Today, grocery stores and grocery-anchored retail centers remain popular places for investors to sink their dollars. Minnesota Real Estate Journal recently spoke to three analysts with CoStar Group — Kevin Cody, senior consultant; Alexander Levy, senior consultant; and Robin Tranthum, consultant – about why investors still love grocery stores.
Here is some of what they had to say.
Grocery stores have performed especially well during the pandemic. What are some of the reasons for this?
Alexander Levy: At the start of the pandemic, a lot of retailers were facing lockdown measures. Grocery stores were one of the few segments that were able to stay open. Not only did grocery stores stay open, they saw an increase in demand. Grocery stores, along with building materials and supply stores and some of the wholesale stores and discounters, proved to be strong during the pandemic. And they have continued to stay strong throughout.
Kevin Cody: Grocery stores, because they were deemed essential, stayed open. They are where people went, especially when the stay-at-home orders were first enacted in many states. We have also seen a pickup in online grocery sales. Compared to other types of retail, grocery stores are not as exposed to competition from e-commerce, too. That has also helped these stores remain an attractive investment type.
I guess it’s not that surprising that grocery has performed well during the last year or so. This sector was doing quite well before the pandemic, too.
Levy: Grocery has definitely been an attractive segment for investors for several years. The retail closures that we track have been mostly apparel and traditional retailers. The necessity-based segment of retail, of which grocery is an important part, has remained resilient. We have also seen that neighborhood retail centers and community centers typically have a grocery tenant today. Those that do, perform better. The occupancy rates hold up better. Just look at indoor malls. They an outsized share of apparel tenants. They have seen their vacancy rates rise because of this. If you have a center with a grocery store anchoring it, you’ll see the vacancy rates fall.
Do the other stores in a grocery-anchored center see an increase in business because of that grocery store?
Levy: Normally they would. Grocery anchors are an important part of these centers. They do draw customers to the other, smaller tenants in those centers.
We’ve seen some interesting changes from grocery stores during the pandemic. Many have increased their curbside pickup and delivery services. Do you think some of these pandemic-influenced changes will become standard offerings from grocers?
Levy: The technology improvements I think will definitely stick around. Customers have gotten used to those services. I think enhanced delivery and curbside pickup are here to stay. We have certainly seen a significant increase in these measures.
Cody: I would agree. We have some surveys that support the idea that people have been enjoying buying their groceries online. I expect they’ll continue to do it even after the pandemic. It won’t stick around at the same level as it was at last year, but it is a service that customers will continue to use.
In addition to grocery stores, what other type of retail has done better than expected during the pandemic?
Levy: Power centers have done well, just like the grocery-anchored locations. The power centers tend to have a Home Depot or a Target or Walmart. They usually feature some of the big-box stores. They have done very well during the pandemic. That’s because they offer the necessities. Walmart and Target do offer groceries and other necessity goods. Home Depot offers necessity-based goods. Customers still needed the items they were selling even during the pandemic.
Cody: We have also seen single-tenant stand-alone retail do well during the pandemic, both in terms of being able to maintain occupancy and from the transaction side. Single-tenant, stand-alone retail has been another bright spot during the pandemic.
What about fast-casual chains with drive-throughs, places like Chick-fil-A?
Cody: We know that based on sales data, restaurants have been hit really hard by the pandemic. Sales are down across the country. But we have definitely seen some winners in the restaurant industry. The fast-food and quick-service restaurants with drive-through service that also embrace delivery have done quite well. These restaurants are actually expanding their footprints during this pandemic.
Has there been anything during the pandemic that has surprised you concerning the retail market?
Levy: I don’t know how big of a surprise it is, but it is a change. Before the pandemic, experiential retail had been one of the strongest sectors for growth. But because this type of retail was largely shut down at the beginning of the pandemic, it has really struggled during these last 12 months. Experiential retail is struggling the most among all retail types. Movie theaters have been closed or are working with limited capacity. Restaurants were closed for a while. Fitness centers have had reduced capacity. They are starting to reopen now. But we’ll have to see how long it takes for experiential retail to recover.
Do you think that experiential retail will regain its momentum once the pandemic ends?
Levy: I do think it will bounce back. Just looking at how retail sales have been improving over the past couple of months, we are seeing that consumers are ready and willing to spend. We just need to have things keep opening up. Consumer confidence will build.
Robin Tranthum: I think it depends on the type of experiential retailer. Movie theaters and fitness centers, for example, might not get back to the fast pace of growth that they saw pre-pandemic. The main movie companies are putting movies on streaming services. That might keep more people from going to movie theaters in the future if that trend continues. Many people have bought home gym equipment during the pandemic. They might not want to rush out to the gym once the pandemic ends. It will take time for demand to come back to those type of retailers.