If you subscribe to Michael Pollack's theory, investors make their money when they buy commercial real estate, not when they sell it. To believe otherwise is to embrace the greater fool theory. “If you pay too much for a property, you are a great fool for buying it, and you need a greater fool to bail you out,” says Pollack, president of Michael A. Pollack Real Estate Investments, a private owner and operator of shopping centers based in Mesa, Ariz.

So, in light of the fact that cap rates have fallen 200 basis points in two years, who are the fools overpaying for grocery-anchored shopping centers these days? The most obvious answer is 1031 exchange buyers, highly leveraged private individuals taking advantage of cheap debt. “We're dealing with people who unfortunately are not veterans of commercial real estate. They don't understand the potential ramifications in the event that you lose that grocer as a tenant,” says Pollack, a 30-year veteran. For example, if a grocer does vacate a space, there are typically co-tenancy provisions that enable a smaller tenant dependent on the grocer to cancel the lease.

Inexperienced owners also can make bad assumptions about future rent growth. A grocer may pay $10 per sq. ft. today in rent, and when the lease rolls in five years the space may only be worth $5 per sq. ft., depending on its location, the surrounding demographics and the strength of the center. That's why owners who are paying high prices for marginal centers are going to get burned when it comes time to refinance at inevitably higher interest rates. “There are people buying projects who have no exit strategy. The only way out is to lose money, and that's not the way real estate is supposed to work,” says Pollack.

To be clear, up until now the threat of grocery-anchored centers going dark and the landlord not being able to refill that space with another supermarket anchor has been minimal, provided the real estate is in a good location. When Albertson's closed several stores in the Houston area last year, the space was quickly refilled by big-name grocers such as Kroger, Randalls and H-E-B.

But the competitive landscape today is vastly different than 10 years ago. Supermarket chains are under profit pressures more than ever before. The expansion of Wal-Mart Supercenters and warehouse clubs along with the emergence of such high-end grocers such as Whole Foods and Fresh Market is cutting into the market share of existing grocers. Already, Wal-Mart supercenters account for 7% of the domestic U.S. grocery market, according to Merrill Lynch. In 2009, Wal-Mart supercenters' share of the domestic grocery market is expected to reach 16%.

Wal-Mart currently operates 1,300 supercenters nationwide, and that figure is expected to reach 2,700 by the end of the decade. In short, the category killer represents a formidable threat. “Wal-Mart is a very fierce competitor,” says Pollack. “They can literally wipe out a whole trade area. They are the Microsoft of their field.”

Against those competitive forces, not all grocery-anchored centers are created equal and not all will prove to be cash cows. Investors need to do their homework and be prepared to walk away from a deal if the economics don't make sense. In other words, let someone else play the fool.