The trend among multifamily developers to add a premium grocery component to projects has become popular in many U.S. cities in recent years, and it’s easy to see why. A new report by Bethesda, Maryland-based RCLCO Real Estate Advisors found that developers are often able to charge a premium on rent for easy access to food shopping.
But it appears not all grocery chains are the same when it comes to tenant demands.
The RCLCO report found that having either a Whole Foods or a Trader Joe’s store within a multifamily development allows landlords to charge 5.8% more, on average, than comparable apartment complexes nearby. In a similar analysis in 2016, RCLCO found a ground-floor Whole Foods earned a 4.3% premium, and a Trader Joe’s generated only a 3.2% premium.
In its latest analysis, RCLCO also found that “other premium grocers” achieve a 3.3% premium. Those other grocers included in the analysis were Safeway, Sprouts Farmers Market, Fresh Thyme, Harris Teeter and Fairway Market.
“The presence of a ground-floor premium grocer has a meaningful impact on apartment performance, measured in terms of rental rates and lease-up pace,” the report said. “Brand cachet, particularly among Millennials who have been the primary target market for most new apartment buildings, is clearly important, as properties containing a Whole Foods or Trader Joe’s on the ground floor are able to achieve the highest rental rate premiums.”
The report said the popularity of an on-site Whole Foods or Trader Joe’s location highlights the “growing importance of convenient access to high-quality, wellness-oriented grocers to renters, particularly affluent renters in major metropolitan areas.”
Whole Foods, in particular, has been the benchmark for added value to a multifamily development, the report said.
A Whole Foods location is often likely to drive rent growth on top of the premium those multifamily developments can charge for the added convenience.
“When comparing the relationship between average rent premium and average rent growth for 2018 to 2019, Whole Foods properties that achieved the highest premiums also experienced the strongest rent growth, reflecting a positive linear relationship between rent premium and rent growth,” the report said.
Meanwhile, the report said a Trader Joe’s location does not always bring the same value, when it comes to rent growth.
“Buildings with Trader Joe’s experienced a flat relationship, meaning that higher premiums did not necessarily correlate with stronger rent growth,” the report said.
Charging more for an on-site premium grocery location also does not appear to hurt unit absorption rates, the report said.
“When these grocer-anchored buildings first open, their capture rates tend to exceed their fair share of submarket demand but stabilize to approximately fair share levels over time,” the report said.
RCLCO based its report on case studies of 64 apartment communities in 20 different metropolitan statistical areas, each of which contain a premium grocer on the ground floor.
To date, the only multifamily development in Houston with a Whole Foods location incorporated into it is on the ground floor of Houston-based Morgan Group’s Pearl Marketplace. The 40,400-square-foot Midtown grocery store is at 515 Elgin St.
Morgan worked for more than a year to secure its first-ever deal with Whole Foods in 2015.
The Whole Foods location opened late last year.
According to RCLCO’s report, the Pearl Marketplace’s rental premium is 8%. The report compared the Pearl to fellow Midtown apartment complexes Camden McGowen Station, Mid Main Lofts and 3800 Main II.
Whole Foods Market in Midtown
Elsewhere, the Buffalo Heights mixed-use development at the corner of Washington Avenue and South Heights Boulevard landed an H-E-B location to anchor the project.
The H-E-B store at 3663 Washington Ave. offers customers 96,000 square feet of shopping space, as well as access to the store’s Roastery Coffee Kitchen, a wine- and beer-tasting counter, a pharmacy and a number of prepared meals that are ready to serve within minutes.
The store’s official opening date was Oct. 9. Buffalo Heights also features a 36,000-square-foot office building dubbed One Buffalo Heights and a 232-unit multifamily portion dubbed St. Andrie.
Buffalo Heights is a development of BKR Memorial, a Houston-based, privately held company of the Russell and Glenda Gordy family. Houston-based Midway is handling the development of Buffalo Heights on BKR Memorial’s behalf.
Buffalo Heights H-E-B
Marvy Finger, the founder and CEO of The Finger Cos., was one of the first developers in Houston to incorporate a grocery store in apartments, with the Phoenicia grocery store on the ground floor of the One Park Place apartment tower downtown.