Developers Talk Shop: Phillips Edison & Company

12/1/2017

Back in the 1990s, two former Taubman leasing agents named Mike Phillips and Jeff Edison had a notion that they could form a thriving real estate company by focusing on community shopping centers built around supermarkets. Decades later, with hundreds of centers nationwide, Phillips Edison & Company’s vision endures.


You recently acquired some assets to form a $4 billion grocery-anchored center REIT with a portfolio of 235 centers in 32 states. How does this help your business moving forward?


If you add that to the properties of our other entities we manage, it brings us to a total of more than 340 grocery-anchored shopping centers in 33 states that we own and operate. We feel that the additional scale opens up a number of growth, acquisition, and liquidity opportunities for us. It’s a benefit for us and a benefit for shareholders.


Grocery-anchored centers remain the fastest-growing sector of retail and, as a result, there are a lot of new players on the scene. What do you think about Amazon’s acquisition of Whole Foods?


We think Amazon’s commitment to bricks-and-mortar de-risks our business. When Amazon announced its deal with Whole Foods, it validated the long-term need for physical storefront locations. This acknowledgement of the value of bricks-and-mortar real estate has had a positive impact on the risk profile of our business. We consider it a new tenant creating additional competition. But when you come down to it, Whole Foods is a very small company, so Amazon is not making a huge penetration. It’s a test for them, and an expensive test.


When it plays out, do you envision them having some dramatic impact on the business of grocery-anchored centers?


From what I’m seeing, the internet strategy for grocers is going to be click-and-pick. Could Amazon turn Whole Foods into an internet physical plant? Absolutely. We believe Whole Foods will most likely be a hybrid experience of in-store and shipping. We’ll see it compete a little bit on price, though stay at the higher end of the market. Amazon’s biggest impact will be through the in-store shopping experience.


A much more significant incursion into the market was made this year by the German value grocer Lidl, isn’t that so?


We were very concerned when they opened, and we’re still concerned today. But we believe their store will compete with Aldi and other highly promotional grocers. Lidl is still establishing their customer base. They’re head-to-head with Aldi. The biggest impact will be on the discount grocers, including Walmart. Aldi is the survivor in that business, in our opinion.


What about the non-grocery side of grocery-anchored centers? What new tenant trends do you see in the coming five years?


This is still classic retail. It goes center-by-center based upon the local customers. It’s all about what the consumer wants right now. The changing retail environment has always been a part of our business, but we see two uses in particular gaining in popularity. One is having medical offices closer to people’s homes. They’re easier to access and less expensive than hospitals — sort of like what the drug store used to be in our centers. The other is anything fitness-oriented. When we started in this business 25 years ago, grocers had covenants concerning the presence of gyms because of the parking issue. Now their attitude is “bring ‘em in.” Inline medical performs in a similar way. After the doctor, you need to go to the pharmacy.


To sum up, what you’re saying is that things are changing, but things have always been changing.


Retail always has had change. When Walmart came into the grocery business, the changes were so much more dramatic than what we’ve seen from the internet. Walmart has grown from not being in the grocery business to controlling 20% of the grocery market today. The internet now controls less than 2% of the grocery business so there is a long way to go to be the disruptive force that Walmart has been. Our retailers depend on the traffic that is driven to the center by the grocer.  It’s a concept we’ve been pushing for 25 years and one that we strongly believe in. We had two of the best leasing months in our history this year.

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