Maximize necessity retailers for thriving centers

Lamar Station Plaza on West Colfax in Lakewood has several necessity retailers, including a Dollar Tree and Planet Fitness.

Thomas M. Yockey
President, Broad Street Realty LLC

Despite reports of doom and gloom for brick-and-mortar retailers, one sector across the shopping center inventory is thriving – neighborhood and community shopping centers with a tenant base focused on providing “necessity retail.” Since 2007, we have focused on acquiring, managing and leasing necessity-oriented shopping centers, having acquired 16 such centers located in the mid-Atlantic and Denver markets. Reviewing the locational characteristics of this portfolio, as well as some of the key types of businesses located in these centers, provides insight into why this is an attractive investment strategy, despite the impressive growth of online retailing. We like to say that the “proof is in the pudding,” and, if you exclude the few centers that we are in the process of repositioning, our portfolio tenant occupancy rate is 98 percent, while REIS reports that the U.S. strip mall occupancy rate is 90 percent.

From a locational perspective, we generally have found that highly visible shopping centers located in denser, established older neighborhoods with middle-class incomes have the potential to thrive with a necessity retail tenant base. Also, these types of centers typically are older – built between the mid-1960s to mid-1980s – and often suffer from age and deferred maintenance. Primarily for this reason, they can be acquired well below replacement cost. Even including the capital costs to modernize these centers, the relatively low basis allows the owner to charge reasonable rents and be the low-cost provider in the marketplace, while still providing attractive investment returns.

Reviewing our portfolio tenant roster gives some insight into several types of retailers that successfully provide necessity goods and services. One common characteristic is that these tenants, for the most part, do not compete with the internet.

• Value fitness centers. For example, the last time we checked, you don’t work out on the internet. Our portfolio contains several fitness tenants like Planet Fitness and Crunch Fitness. They are important because they average about 10,000 members per location, and on Mondays, their typical busiest day (guilt day after an indulgent weekend!), they can have 1,000 visitors or more. Not only are they a great driver of customer traffic, but also at an average of 20,000 square feet, they are an excellent candidate to replace larger box tenants that are suffering from internet competition, like drug stores.

• Restaurants and bars. It also is likely that you don’t eat out on the internet. The public is seeking experiential activities like eating out, and we average five food and beverage tenants per center – topping out at 15 at our Shops at Greenwood Village near Denver, with several more restaurants slated to open there this year. Successful and desirable restaurant tenants can include nationals, fast casual, fast food and local mom-and-pops.

• Dollar stores. To continue the theme, generally you don’t buy items for a dollar on the internet, and dollar stores are one of the fastest-growing sectors in brick-and-mortar retail. Even on Amazon’s recently launched “$10 and under with free shipping” category, there are very few items in the $1 to $5 price range. There are several theories driving dollar store growth. One is the demise of department stores, which is helping drive a shift by middle- and lower-income consumers to dollar stores. Another is the evolution of dollar stores to offer more “consumables” (read: food) that are not as competitive with the internet (more on that later). In our portfolio, we have 12 dollar stores, and two of our centers contain two dollar stores. Look around and you will notice that it is not uncommon to see a Dollar Tree, a Dollar General or a Family Dollar within a short walk of each other.

• Grocery stores. The relationship between brick-and-mortar grocery stores and internet grocery sales is more complicated but interesting. Almost all of our centers contain a grocery store, and, for the most part, they have reasonable year-over-year sales growth, despite the internet capturing a growing share of the grocery market. One reason is that the internet grocery store model is evolving away from large warehouse fulfillment centers to one where internet grocery orders are being fulfilled from grocery stores closest to the consumer. A perfect case in point is Amazon’s purchase of Whole Foods, providing Amazon with an instant, well-located distribution network to serve its higher-income online grocery customers. The result is that internet grocery sales are driving sales at grocery stores, rather than competing with them.

Another interesting grocery trend is the growth in ethnic markets, of which we have several in our portfolio. We have one market in Baltimore that has per sf sales that are almost double of a typical national grocery store. There are several reasons for this higher performance, one being that ethnic markets can serve as distribution centers for ethnic restaurants, helping to drive grocery sales. Next time you are in an ethnic market, notice the stacks of 50-pound bags of rice that are probably not intended for the typical grocery shopper.

Featured in CREJ’s May 2018 Retail Properties Quarterly. 

Edited by the Colorado Real Estate Journal staff.