Real estate developers may have heard or talked about community grocery stores and the potential investment value payback of these new multifamily amenity facilities. While some researchers say that mixed-use or multifamily communities are the inevitable progressions of modern urbanization, others have been more resistant to the concept.
In this article, we’ll break down why community grocery stores are the most significant amenity of the modern real estate market.
What are Community Grocery Stores?
Community grocery stores are ideally designed directly in residents' apartment buildings. This growing trend, which developers see as the natural next step of the "corner store," opens doors for communities that are focused on having everything you need in one building.
More than Just a Grocery Store
Most community grocery stores separate themselves from the crowd by offering a more upscale shopping experience. It wouldn't be unusual to find locally made product options. As such, they provide a diverse and variable selection of food and beverage in a much smaller footprint than your typical large box grocer.
With rents increasing each month, prospective renters want to live in communities with walkable access to various options. Multiunit developers who decide on supporting a corner store will have a competitive advantage within the market.
In addition to these points, community grocery stores help structure a unique multifamily living experience around retail, combining personal and retail space in a way we haven't often seen in the United States.
How Do They Work?
In their simplest form, community grocery stores are public retail spaces within the same building as private rental units. Much like an office building rents out units to different businesses, community grocery stores occupy one part or floor of an apartment building, effectively combining retail space and living space.
Many of the buildings put the grocery store on the ground floor, allowing access both from the street and from units above. Residents may only need to take an elevator from their homes to get groceries.
Why Are They a Big Deal?
The last several years have brought an increase in demand for community grocery stores. For developers, this is a significant trend. As millennials become the target prospective renters, the market is shifting in response to the kinds of amenities they prioritize.
Millennials want living spaces with access to community and with modern smart technology. But even more than this is the trend of wanting access to high-quality, diverse food with plenty of options — the kind of variety you would see at premium grocery stores such as Whole Foods or Trader Joe’s.
Young renters want access to this kind of high quality and variety when it comes to food and beverage, and they want it within easy distance of their living space. But community grocery stores take this idea to a new level. In many of the buildings that now implement community grocery stores, residents can get to the grocery store simply by taking the elevator.
They also increase the perception of security and community, other things that young renters say they look for in a rental property. All of these aspects indicate the potential for added value on your investment.
The Whole Foods Effect
The Whole Foods Effect is also known as the Premium Grocer Effect, a phenomenon in which neighborhood value is increased by the addition of a widely known, upscale grocery chain such as Whole Foods. When it comes to community grocery stores, the Whole Foods Effect is experienced even closer to home — literally. In other words, property value increases because of the shared premises with a high-quality, in-demand retail market like these premium grocery stores.
The Premium Grocer Effect
Whole Foods is just one example. Other premium grocery chains such as Trader Joe’s also increase neighborhood value and rental prices. Researchers discovered that adding a premium grocery store on the ground floor of an apartment building increased rental prices by as much as 5.8 percent.
Higher rent premiums aren’t the only investment value under the Premium Grocer Effect, either. These buildings also were more likely to experience growth and, in particular, attract millennial renters, who prioritize finding diverse, high-quality food.
Why is This Multifamily Amenity so Hot in Real Estate in 2022?
So why are these properties coming to the attention of real estate investors now, in 2022?
The truth is that community grocery stores have been getting attention for their investment potential for many years. The COVID-19 pandemic affected market interest and growth, but now, with the prospective of a post-pandemic rebound, the topic is due for revisiting.
Millennials, the target rental market, are no longer children. In fact, the youngest millennials are in their mid-to late twenties, with the oldest members of the generation already in their early forties. In other words, they are no longer looking for one-person apartments. Instead, their generational eye is on homes that can support families and provide a community.
Many millennials have also turned their sights from home ownership to long-term apartment living. Thus, the demand is now for high-quality, family-friendly apartments, usually in urban areas, that also offer easy access to gourmet groceries and other premium amenities.
Rental Growth
A ground-floor community grocery store seems to be tied to rental growth, according to studies conducted in 2016 and then again in 2018 and 2019. But the correlation is indirect, with no guarantee of growth purely on this basis.
What researchers did see was that buildings with a community grocery store experienced higher rental growth than comparable properties without similar amenities. Similarly, rental rate premiums strongly influence rental growth.
Rental Rate Premium
In studies conducted from 2018 to 2019, properties with community grocery stores — specifically Whole Foods — saw high rental rate premiums and strong rent growth. Other studies did not see a strong correlation, indicating that high premiums can influence rent growth, but do not necessarily do so.
Generally, the presence of a premium community grocery leads to high rental rate premiums, leading to the hope that these will in turn affect rent growth.
Increase Real Estate Value
The presence of community grocery stores increases real estate value by affecting all the other aspects we have already mentioned: rental premiums, growth, and more. This value is estimated in comparison to other similar properties that do not have a premium community grocery store.
Absorption Rate
So, what about absorption rate? How does the presence of a community grocery store, contrasted with premium rents, affect this?
A study in 2016 on the emerging phenomenon of community grocery stores found that premium rental rates did not slow absorption in attached buildings. The trend indicates that the absorption rate in these units starts out higher than average and levels out over time, but tends to remain on par with the absorption of other properties.
In other words, when these buildings first open, demand outstrips supply. Over time, they even out.
Pros and Cons of Developing Community Grocery Stores
So to summarize, what can we say are the pros and cons of developing community grocery stores? There are quite a lot of benefits and few, if any, disadvantages.
Benefits of a Community Grocery
Convenience
When it comes to shopping convenience, it doesn’t get much better than being able to buy groceries without having to leave home. Quick and convenient access to grocery stores is a priority for potential renters, and having a grocery store in your building might just be — especially for urban apartment dwellers — the ideal.
Community
Having a public retail space in the same building as private residences can easily affect the building community since it seamlessly blends people’s retail habits and their personal lives. For residents, this can be an appealing factor, offering an easy way to mingle and get to know their neighbors (especially if the store has additional amenities such as a coffee shop).
Safety
Studies indicate that the presence of grocery stores impacts the safety of neighborhoods and that potential renters perceive that. One study indicated that 81 percent of responders said they would feel safer in a building that also had public retail space.
Sustainable Living
Reducing the number of cars on the road is an excellent way to improve the climate. When it comes to going to the grocery store, it doesn’t get much more sustainable than walking down some stairs. When people can easily access groceries and other personal needs, they spend less time in the car, positively impacting the planet.
Profitability
For investors and developers, another benefit lies in the potential profitability of a community grocery store. As we’ve already examined, these kinds of amenities have a direct impact on rental rate premiums as well as demand.
Popularity
When we speak of popularity, we are talking, of course, about demand. We have already discussed the ways that these properties are highly desirable to potential renters, especially when it comes to millennials. This generation is a fantastic target market and one that consistently seeks living spaces with easy access to retail, especially high-end grocery stores like Whole Foods.
Cons of a Community Grocery
When it comes to listing cons, there aren’t many to be had. Many investors seem unwilling to dive into the world of community groceries simply because they are a newer concept and they fear a poor response. Some potential renters may dislike the higher rental rates or the prospect of sharing a living space with a retail market.
Their Role in the Community
What effects do community grocery stores have on the wider communities of which they are a part? There are many answers, but a few that stand out are sustainability and the evolution of urbanization.
Sustainability
As we discussed above, one way that premium grocery stores impact the community is through sustainable living. Accessing a retail environment without leaving your home reduces travel time, vehicle usage, and other less climate-friendly practices.
Evolution of Urbanization
As cities continue to grow and develop, the modern perception of urbanization is changing. Increasingly, people look to be able to live their lives in one space, without having to travel extensively. For this reason, many researchers predict that this kind of community living is the inevitable evolution of urbanization in the twentieth century.
The Ultimate Tenant: Why is This The Best Amenity to Look For?
Millennials are now in their late twenties through early forties, and as such, are some of the biggest up-and-comers in the rental market. They are looking for family units, and they have some very specific goals in mind for what their living space should be. Older generations are aging out of the rental market and are less likely to be looking for a new living space, especially one with a modern urban design.
Design Adapted to Modern Lifestyle
Many researchers think that urbanization, as it progresses into the 2020s and beyond, lends itself to the kind of community living found in apartment buildings with community grocery stores. People are increasingly used to doing all their errands in one place but also looking for quality and community right in their living space. Community grocery stores offer an answer to all of these criteria in a way that is uniquely adapted to the modern lifestyle.
The Look of a Premium Building
Premium grocery stores offer the perception of a high-end community. The presence of one of these retail stores in an apartment building gives it the look of a premium building. As such, it generates high demand for its quality, safety, attractive design, and many other factors.
The Bottom Line
Whether community grocery stores truly are the next step of modern urbanization remains to be seen. But early research seems to indicate that they are an ideal community for the modern young prospective renter, who looks for proof of the high quality, convenience, and variety found in a premium grocery store.
