LAS VEGAS — The grocery industry has undergone a major transformation during the past five to 10 years due to changing demographics and shopping patterns, says Joseph McKeska, senior vice president of real estate for Bi-Lo Winn-Dixie, which operates approximately 700 grocery stores with $10 billion in annual sales.
“You have a much broader ethnic mix around the country and that is going to continue to accelerate over time,” remarked McKeska at Retail Trends 2013, an hour-long program hosted by Marcus & Millichap at the Renaissance Las Vegas Hotel on Monday during the ICSC RECon show. What’s more, consumers are taking full advantage of all the options available to them today, ranging from traditional grocers to warehouse clubs to specialty stores to even dollar stores.
Joseph McKeska (center) of Bi-Lo Winn-Dixie talks about the state of the grocery business during Retail Trends 2013 hosted by Marcus & Millichap at ICSC RECon in Las Vegas.
Ten years ago, consumers generally would select one grocery store as their primary place to shop and identify a second store to pick up a few other items. “Today people are shopping in three or four different stores because they are watching cooking shows on the Food Network, or they come from a different ethnic background. So, it’s become a very fragmented market in that regard,” explained McKeska.
Grocers that continue to refine their value proposition and tailor their product mix and promotions to meet the needs of local customers by utilizing the consumer data that’s available to the industry tend to be the most successful, said McKeska. “It will continue to be a very competitive market. It’s very capital intensive,” he emphasized, adding that the grocery business has high fixed and variable costs.
McKeska advises shopping center investors to study and understand the grocer’s business model, the competition and the barriers to entry for new development before jumping into any deal. “There is a lot of emphasis on the financial underwriting [of the transaction] today. While that’s clearly very important, if you want to understand your financial risk, it’s important that you understand the business model.”
Other panelists at Retail Trends 2013 included Joe Dykstra, executive vice president of Westwood Financial Corp; Thomas Roberts, executive vice president and head of real estate investments for Cole Real Estate Investments; and Bill Hughes, senior vice president and managing director of Marcus & Millichap Capital Corp. (MMCC). Hessam Nadji, managing director of research and advisory services for Marcus & Millichap, served as moderator.
Economic Overview
The U.S. economy has added nearly 2.2 million private-sector jobs during the past 12 months, which is modest growth, said Nadji. “It should be closer to 3 million in a normal recovery. This is not a normal recovery.” Indeed, Americans have been deleveraging to get their financial house in order, all the while the federal government has been borrowing at record levels. The national debt currently stands at $16.7 trillion.
The good news is that every major sector of this economy is adding jobs, but the jobs recovery is uneven across the country. “The theme is energy, technology and trade. If you look at metros linked to some of those drivers, they are doing great,” said Nadji. Houston added more than 100,000 jobs during the 12-month period ending in April, for example, and Dallas added about 100,000 jobs. Los Angeles and Phoenix added about 75,000 jobs and 40,000 jobs, respectively, during the same period.
Retail sales per person in the U.S. are 12 percent higher today than they were at the peak in 2007, according to Nadji. “The consumer who was supposed to go head into a cave, and never come back, is back. That’s not to say the consumer can propel the economy by himself. We have to be cautious and look at other drivers of the economy, but the consumer gives us a very small footing.”
One part of the recovery equation that’s been missing until now is housing. The latest retail trends show a 12 percent increase in home prices nationally and about a 10 percent increase in sales on a year-over-year basis. Nadji believes that trend is sustainable.
“We’ve had five years of a lack of new construction and pent-up household formation, and now the fundamentals are supporting the for-sale housing recovery,” said Nadji. Simply stated, new construction will serve as a catalyst for economic growth in ensuing quarters.
Interest Rate Outlook
Hughes of Marcus & Millichap said that in his 35 years in the business, he’s never encountered a real estate market quite like this one. “But we’ve never had a government intervention quite like this one.” Hughes expects the Fed’s bond buying program of $85 billion a month, a strategy known as quantitative easing, to possibly begin winding down next year.
Still, Hughes expects long-term interest rates to rise only slightly this year and in early 2014. The 10-year Treasury yield currently stands at approximately 1.9 percent, well below the 10-year average of 3.61 percent. “We expect interest rates to move up in 2014, but not to the point where it should impact business very much,” said Hughes.
The encouraging news for borrowers is that the capital spigot has been turned on again. Three years ago, everyone thought the CMBS market was dead and would never come back, said Hughes. For all of 2012, domestic CMBS issuance totaled $50 billion. Year-to-date, CMBS issuance totals $32 million, which at the current pace will easy surpass last year’s total. “The CMBS market has made a big impact, particularly as it relates to retail,” said Hughes. “[The CMBS lenders] tend to love retail, and they will move more heavily into that market.
— Matt Valley