Biggest news of the year for CO commercial real estate

Did you see the announcement last week that Amazon was buying Whole foods?  There are currently 20+ whole foods stores in Colorado.  Why such a large impact? Will Amazon shake up the grocery industry just like books?  What does this mean for grocery anchored centers in Colorado?  Along with the Amazon news, Kroger/KingSoopers came out with news that income is down 10% and their stock tumbled 9% last week.  What is going on?

Amazon has shaken the grocery sector to its core with the purchase of Whole Foods.  Why would Amazon want to buy a store known as “whole paycheck”?  According to recent reports Amazon sees substantial upside in automating the grocery industry while lowering prices.  This makes other grocery retailers tremble.  The grocery industry is one of the few industries that has not changed substantially in the last 20 years ago.  Like many folks I still buy groceries basically the same way I did when I graduated college.

How will this impact real estate?  Whole foods is not the biggest player in the grocery market in Colorado.  There are hundreds of Kroger, Safeway, and Walmart locations throughout the state.  Why is the whole foods acquisition monumental? Grocery anchored centers were already struggling before this announcement (see Costar report) and this announcement could be the catalyst for change in the industry.  For example, what if Amazon was able to come in and automate the experience (the technology is there) and eliminate half the headcount of traditional stores (think of how efficient Amazon is in distribution) thereby lowering their costs exponentially? (see Bloomberg article)

The Amazon purchase is a harbinger of “pain” that will be felt throughout the industry.  I see Amazon able to lower costs through efficiency thereby severely crimping the profitability of weaker competitors.  This will play out throughout the commercial real estate sector throughout the state.

Many of the grocery anchored sites will no longer be needed and will be functionally obsolete.  There is not a huge demand for deep retail space.  The in town “hotter markets” in dense metro areas likely will be candidates for redevelopment.    The pain will be acute especially in tertiary markets.  As a result, many of the grocery anchored centers will sit vacant for an extended period of time.

 

What should you do?  Keep a close eye on the grocery anchored centers in less prime locations and the tenants occupying the rest of the center.  Many tenants rely on the traffic from the grocery anchored tenant to survive.  Without this traffic, the other tenants in the center will also likely go out.  Amazon no doubt will shake up the grocery sector and there will be many more losers.  Will Kroger or Safeway be the next Barnes and Noble?

 

Resources:

  1. http://fortune.com/2017/06/18/amazon-whole-foods-prices/
  2. https://www.wholefoodsmarket.com/stores/list/state
  3. https://seekingalpha.com/article/161622-kroger-supermarket-disappoints-and-lowers-guidance
  4. http://www.costar.com/News/Article/The-Heat-Is-On-for-Grocery-Anchored-Retail/140547
  5. https://www.bloomberg.com/news/articles/2017-06-18/amazon-said-to-plan-cuts-to-shed-whole-foods-pricey-image
  6. https://www.bloomberg.com/gadfly/articles/2017-06-26/here-s-a-69-billion-question-is-amazon-coming-for-you

 

Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

Fairview is the recognized leader in Colorado Hard Money and Colorado private lending focusing on residential investment properties and commercial properties  both in Denver and throughout the state. We are the Colorado experts having closed thousands of loans throughout the state.

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