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Not enough of a good thing

BY Al Urbanski

Pat Donahue, together with his late brother Dan and business partner Tom Schriber, has been in grocery-anchored shopping centers since the ’90s. That’s when Schriber calculated that the company’s long-term fortunes, which had rested on mall development up until then, would be better wagered on high-traffic “necessity-based” retail.

“At malls you get ’em three times a month. At necessity-based centers you get ’em three times a week,” noted Donahue, chairman and CEO of Donahue Schriber.

Schriber had the right idea. By 2000, the company had shed its interest in its last mall property, Los Angeles’ Glendale Galleria. Nearly two decades later, Donahue Schriber is still privately held and owns and operates 63 grocery-anchored plazas and power centers in California, Nevada, Oregon and Washington. What these neighborhood retail oases have to offer retailers is stability and predictability, according to Donahue.

“Even in the trough of the last recession, we were still 92% to 93% occupied at all our properties,” he said. “And average rents held steady. We went from $27 to $25.50, but now we’re back up above $27.”

Grocery-anchored centers dominate the retail landscape. There are nearly 33,000 of them in the U.S., according to the International Council of Shopping Centers, compared to just 1,200 or so regional and super-regional malls. Trade areas served by malls can radiate out 15 to 25 miles, but the widest trade areas served by neighborhood centers — as ICSC classifies them — are only about six miles.

The irony, Donahue said, is that the market could stand even more grocery-anchored centers, but few new residential neighborhoods are springing up to support them. More than 2 million new houses were built in the U.S. in 2004, but in the year after the Great Recession hit, 2009, that number plummeted to 583 million and never ticked back up. The Census Bureau reported 595 million housing starts in 2015.

So developers and retailers are left to make the most of what they have, adding restaurants to entice even more customers and scaling up formats to eke average tickets upward.

“We probably go in and recycle properties, take vacant Sports Authorities and move the rents,” Donahue said. “I think that the tenants are doing the same thing: ‘Is there any low-hanging fruit here we can add to the bottom line?’”

New neighborhood centers do continue to go up where opportunities present themselves. Regency Centers, for instance, recently completed the Whole Foods-anchored Village at La Floresta in Brea, Calif. It also just purchased property at the master-planned Tustin Legacy community in Orange County for a 112,000-sq.-ft. center to be anchored by Stater Bros. Market.

Because less investment is needed on the part of developers to build centers than malls, they can be strategically situated to access special population clusters. Take VEREIT’s University Plaza, a 165,615-sq.-ft. center in Flagstaff, Ariz., anchored by a Safeway and including a Bed Bath & Beyond, a Ross Dress for Less, and a PetSmart. A goodly amount of this center’s traffic walks in across the street from the campus of Northern Arizona University. Meanwhile, members of another important shopper segment can hail from thousands of miles away: tourists en route to the Grand Canyon.

“Flagstaff is a strong secondary market because of the access to the University and the tourists,” said Jennifer Daniels, director of leasing at VEREIT, which counts Albertsons and BJ’s Wholesale Club among its top 10 tenants.

Yet, though VEREIT is a real estate investment trust that owns and manages nearly 5,000 properties in 49 states, it maintains a significant presence in grocery-anchored centers for the same reason Donahue Schriber does: It’s the most stable of shopping center formats.

“We’ve had a lot of luck in keeping this center 100% leased,” Daniels said. “Grocery stores have their loyal customers and shop the brand multiple times weekly. Those people become the other tenants’ customer base, as well.”

A similarly situated center in Irvine, Calif., is an exemplar of one of the biggest movements in the grocery-anchored formats — specialization of the retail offerings to suit the more variegated tastes of locals. University Center, adjacent to the campus of the University of California at Irvine, recently received an architectural and landscaping upgrade and complemented its Trader Joe’s anchor with farm-to-table food providers and ethnic restaurants such as Mendocino Farms and the ADYA Indian restaurant. Next year, it will sit on retail’s cutting edge as the site of Target’s first urban-style, flexible format store in Orange County.

“We have several centers in our portfolio that have a specialty food market as well as a traditional supermarket,” said Dave Moore, president of Irvine Company Retail Properties, owner of 43 outdoor centers in California, including University Center. “At Woodbury Town Center in Irvine we have a Ralph’s and a Trader Joe’s, and at Westpark Plaza we have an Albertsons and a Sprouts, and both centers serve their communities very well.” Operators of neighborhood centers are fairly unanimous in their belief that the format must always be evolving to suit changing local customer bases. Moore is of the opinion that the Irvine Company has an edge in this area due to its origins as a master-plan developer of a former 93,000-acre cattle ranch in Irvine 50 years ago.

“We’re very in tune with our consumer base, which has evolved a lot over the past 20 years,” Moore said. “It’s grown in size and in diversity, both ethnically and economically. And so, of course, we’ve evolved over time in terms of retail.”

The knock of opportunity can also serve retailers and developers in making more of what they’ve got. Pairing two traditional food retailers together in a center is uncommon, but not impossible, as National Realty & Development Corp. proved in New Jersey. The Walmart in NRDC’s Pohatcong Plaza in Phillipsburg announced that it wanted to open a supercenter in the area, but Pohatcong had Stop & Shop as its grocery anchor for going on 20 years and the food component of a supercenter would be competitive with it.

“NRDC developed the adjacent property to accommodate Walmart’s larger prototype store,” said Dovid M. Spector, senior VP of leasing for NRDC. “Marshalls had come to us with an interest in the market, so this gave us the ability to back-fill the Walmart lot with HomeGoods and Hobby Lobby.

While the parcels remain separate, a new stop light at the extended Greenwich Road Extension provides access to Bliss Road, which provides access into both the original Pohatcong Plaza and the new lot.

“We recently secured Ulta, which is testament that if you reinvest in a property with quality tenants the shopping center will attract new categories to service the community and enhance the merchandising mix at the center,” Spector said. “You can create a different dynamic.”

Phillips Edison President and COO Mark Addy finds that the dynamic in play is in food offerings presented at centers, both in grocery and prepared.

“New grocery formats are growing 10% to 15% a year. Regular grocers have been forced to compete and are expanding fresh sections in their stores,” he said, noting that Phillips Edison, a 25-year veteran in grocery-anchored formats with a presence in 35 states, has always aimed to place one of the top two local supermarkets in its centers. A driving factor in this trend, Addy said, is a move to more urban lifestyles presenting greater dining options.

“People are living in smaller apartments and going to the market on a more regular basis, in some instances shopping every day,” he said. “We’ve become the communal pantry.”

The urban living movement has forced a bifurcation in the grocery sector with growth coming in the discount and upscale ends of the business. So while Phillips Edison’s two biggest grocery anchors remain Kroger and Publix, the company also leases space to the likes of Save A Lot and Trader Joe’s.

One example of the future of grocery-anchored centers may now be taking shape at Tustin Legacy, a 1,600-acre master-planned community on the site of a phased-out Marine Corps Air Station in Tustin, Calif., that will contain 6,800 residential units. There, Regency Centers’ planned Village at Tustin Legacy, anchored by Stater Bros., will include common necessity-based retailers such as Great Clips, Bank of America, and CVS, but also new lifestyle-driven tenants like Great Foundations Montessori and Board & Brew. The aviation-themed design was conceived for future growth, with tall store ceilings for tenants and outdoor patios connected by wide pathways for shoppers.

It’s not so much that the mix of retail formats in the centers will upscale in coming years, it’s that the traditional neighborhood center retailers will be upgrading, noted John Mehigan, senior VP and senior market officer for Regency in Los Angeles.

“You’re still going to have the pizza place, but it’s going to be chef-driven and offer gourmet options and nicer dining areas. Some of the nail salons we have are like day spas you’d see in a five-star hotel,” Mehigan said. “The new micro-gyms like OrangeTheory and Soul Cycle are loved by other tenants. People come out of them with a positive feeling and they want to go buy things. We’ve seen overall sales increases in centers where these concepts have come in.”

The future vitality of grocery-anchored centers depends as much on tenants as it does on owner-operators, Mehigan says. They’re the ones who have to stare down the 800-pound gorilla stalking all brick-and-mortar retailers — online shopping.

“The retailers that fear the Internet are going to fail,” he said. “Our smartest tenants are on fire with social media. They’re connecting with local residents with promotions and inviting them to come to the centers for special events. One of our tenants has 100,000 followers on Instagram.”

The shopping center format with the most amount of locations across the American landscape promises to be the one forcing the greatest amount of change in brick-and-mortar retail. Following are several examples of grocery-anchored innovators.

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