CREJ

Page 20 — Retail Properties Quarterly — May 2021 www.crej.com R eal estate considerations in the grocery sector are changing fast – and that stands to affect landlords, supermarket chains and grocery wholesalers across Colo- rado. Start with Amazon’s plans to dis- rupt the $800 billion U.S. grocery industry. After opening the first Amazon Fresh grocery store in Sep- tember in Woodland Hills, Califor- nia, the company currently has sev- eral locations in Southern California and one in Chicago. Amazon is reportedly pursuing numerous new locations around the country and recently confirmed plans to open grocery stores in Washington, D.C., Northern Virginia, Pennsylvania and Maryland. Can certain markets in Colorado – places like Denver, Colo- rado Springs and Aurora – be far behind? Meanwhile, on the edited-assort- ment, hard-discount end of the business, Lidl and Aldi continue with their aggressive expansion plans. Lidl aims to open 50 new stores this year at a cost of more than $500 million, and Aldi has spent $5 billion to open 500 stores in just the past five years. The exact timetable is unclear, but it’s a safe bet that grocers can count on Lidl and Aldi eventually arriving in Colo- rado. Research shows that when these operators debut in a new market, their competitors end up dropping their prices. Finally, Kroger, which is the parent company of King Soopers, contin- ues to push ahead with its mas- sive investment in e-commerce fulfillment. In mid-April, the Cincinnati-based operator unveiled a 375,000-square- foot Ocado auto- mated warehouse in Monroe, Ohio. It’s part of a planned rollout of 20 such facilities, estimated to cost $1 billion in total. While a Colorado Ocado may not yet be in the works, it is a distinct possibility moving forward – an additional source of pressure for competitors in the state. n Maximizing portfolio efficiency. The bottom line here? Supermarkets in Colorado are likely to face even more intense pressures with respect to both price and convenience moving forward. Amid consumers’ ever-increasing reliance on pickup and delivery of online orders, the arrival of large-scale and micro- fulfillment centers could necessitate a thorough reconsideration of store footprints and locations. To rational- ize and properly position your port- folio, the first step is to determine your broader strategy given these developments. Where do you want your stores to be and what physi- cal requirements will you need in the future? Which underperforming assets do you need to either reposi- tion or exit? What are your plans for omnichannel fulfillment and your physical stores? Grocers should plan early for lease expirations and store closures to give themselves enough time to align their real estate with such goals. For your best locations, you may want to negotiate a longer lease in exchange for lower rent or other considerations that will bolster your competitiveness. The landlord, for example, could partially fund your remodeling project or agree to spruce up the shopping center. When the average lease length at a shopping center goes up, so does the resale value of the prop- erty. That makes landlords eager to negotiate longer terms with their best operators. Suppose for a moment that a grocer with a 50,000-square-foot store pays $15 per sf, or $750,000, in annual rent. It’s a high-performing store, so the grocer intends to allocate $3 mil- lion in reinvestment capital for a renovation. Extending the lease for 10 years poses little risk to the grocer, and for the landlord it could increase the resale value of the cen- ter by up to $2 million. Colorado grocers need to revisit their assets Trends Joe McKeska Senior managing director, A&G Real Estate Partners Please see McKeska, Page 27 Amazon Amazon continues to disrupt the $800 billion U.S. grocery industry, with more openings planned for Amazon Fresh grocery stores. Nothing has been announced for Colorado yet, but expectations are several local markets should be on the company’s radar.