Among investors actively seeking grocery-anchored shopping centers is Cole Real Estate Investments, a Phoenix-based commercial property owner and manager. The firm puts an emphasis on premium quality properties. Retail Traffic talked with Scott M. Holmes, the company’s senior vice president for acquisitions, multi-tenant retail, about what Cole looks for in an anchor.
Retail Traffic: In today’s market, are grocery-anchored shopping centers still considered the safest bet in the retail real estate sector? Why or why not?
Holmes: In general, we believe that grocery-anchored shopping centers in strong markets are perceived as lower-risk, which is reflected in their pricing and lower cap rates, and is the reason they continue to be targeted by institutional investors. At Cole, we find grocery-anchored centers appealing, because they are needs-based, drawing daily and weekly shoppers. Often times, the smaller shop space is filled with similar necessity-based retailers, creating additional and regular shopper traffic.
RT: When Cole evaluates a potential acquisition opportunity, how much do you focus on the specific grocery brand anchoring the center?
Holmes: The strength of the grocer’s brand is very important. We look at two primary factors when initially evaluating a grocery-anchored property for acquisition. First is the credit quality of the grocery anchor. The second key factor is market share, both in terms of that operator’s brand in the larger market and then that individual store’s local market share in its trade area.
RT: If the name of the grocery anchor plays a role in your acquisition criteria, which chains does Cole currently prefer and which does Cole try to stay away from? Why?
Holmes: At Cole, we try to focus on the dominant grocer in each market. For example, we recently acquired several Publix-anchored grocery centers in the Southeast, and in Texas we bought two centers anchored by H-E-B. Those respective operators are among the leaders in their markets. Safeway and Kroger brands can also be appealing, because they have investment grade credit, but we still look at each store within the market and how they fare against the competition.
RT: How much of a role does the identity of a tenant play in an asset’s valuation?
Holmes: The credit quality of the tenant and their market share both play an important role when we evaluate pricing for an acquisition. The number one market share grocer brand in any given market will typically command a lower cap rate than the number two and lower market share brands. Another key factor is the historical sales performance of the grocery anchor. We want to see strong sales and positive sales trends, which would indicate a healthy, growing trade area.