Investors' love affair with grocery-anchored centers in Florida isn't fading in spite of rapid price escalation, usually the harbinger of an imminent real estate bust, real estate experts say. “We do not think that there's a bubble (in this market),” says Brian Snow, director of research for Real Capital Analytics, a New York-based real estate research firm. “Prices are not over-valued relative to replacement cost.”
Still, the prices being paid for grocery-anchored centers are raising eyebrows. In April, Hollywood Hills Plaza, a 25-year-old shopping center in Hollywood, Fla., anchored by a Publix grocery store and a Target, was sold by Davie, Fla.-based Ross Realtyto Weingarten Realty Investors for more than $39 million, yielding a gross profit of $10.6 million after a hold period of just over two years. These kinds of profits leave investors salivating.
Hollywood Hills Plaza isn't an isolated example. The average price per square foot for grocery-anchored centers in Florida year-to-date through August was $124 vs. $91 for all of 2002 — a 36.5% increase — based on recorded sales transactions, according to Real Capital Analytics. Meanwhile, the cap rates for grocery-anchored centers averaged 8.4% through August vs. 9.5% for non-grocery anchored centers, according to the firm, which tracks retail transactions $5 million and higher.
There's further evidence of the momentum building in this niche. In the first half of 2003,sales for grocery-anchored centers in Florida totaled $511 million, compared with $368 million in the first half of 2002 and only $260 million in 2001, reports Real Capital Analytics.
Population growth, attractive household income levels and historically low interest rates have made the grocery-anchored sector a hot commodity in the Sunshine State. While other Sunbelt markets such as Atlanta andalso are gaining population, “the income is better in Florida, at least in top metropolitan areas like West Palm Beach and Tampa,” because of the large concentration of retirees and tourists, says Kelly Whitman, real estate economist at Property & Portfolio Research in Boston.
The University of Florida projects between 280,000 and 300,000 people will move to Florida annually for the next decade. That translates into 25 to 30 new grocery stores each year, says David Marks, president of Marketplace Adviser, an Orlando-based real estate consultant.
More grocery-anchored centers are popping up in Florida than elsewhere, says Lori Schneider, senior director of the national retail group at Marcus & Millichap in Ft. Lauderdale. “The cap rates for these centers are 25 to 50 basis points lower in Florida than in the rest of the country.”
Consequently, Whitman believes that the pricing for grocery-anchored centers “has gotten a bit rich.” She expects cap rates to rise and prices to fall a bit.
What could dampen enthusiasm for this niche is the growing number of price-conscious consumers who frequent Wal-Mart and other supercenters. The specter of these giant discounters adds risk to the purchase of these cash cows, says Marks. “There is too much capacity in grocery stores,” he says. Although there is a need for stores in new areas, there will be a shakeout in existing, predicts Marks. “If you have a portfolio of grocery stores, it is important to affiliate with the right grocer. In Florida, Publix and Wal-Mart are strong.”