A new report in Winsight Grocery Business this week has cast a speculative light on how physical grocery stores—the essential brick-and-mortar retail segment that has shown real resilience amid the covid pandemic—might evolve in the post-covid real estate economy.

The piece quotes New York architect David Katz, who is predicting a “bifurcation” in how physical grocery square footage is allocated in favor of areas on the building perimeter—traditionally the produce and freezer aisles—while products typically consigned to the center aisles shift to microfulfillment centers.

Winsight noted that grocers have historically struggled to operate delivery services profitably, particularly for refrigerated items and fresh produce with limited shelf-life. But non-perishable, shelf-stable items don’t face those same storage constraints and could benefit from accelerated demand for delivery technology. This, in turn, would free up valuable in-store space for grocers (and, presumably, continue to juice the market’s insatiable thirst for warehouse and logistics real estate).

Hell is other shoppers

There are also changing social dynamics at play. One-way aisles, mask mandates, adjusted hours, and per-customer purchase limits instituted by many grocers early in the pandemic may have exposed some of the fault lines of the physical shopping experience.

A study by the marketing firm C+R Research and reported in Food Navigator USA revealed 19 percent of respondents in a random sample of 2,000 American shoppers had witnessed a verbal argument in a grocery store, while 11 percent had witnessed a physical altercation in a grocery store since the onset of covid.

Sixty percent of those surveyed in the early pandemic period also said they were “fearful” or had a “sense of anxiety” when shopping at physical grocery stores. (It is not clear whether or to what extent these consumer concerns may have allayed over time and with greater scientific insight into the risk factors and transmission mechanisms of covid.)

“The center store aisles are also likely to disappear because during the pandemic’s social distancing mandates, they were one of the biggest friction points in the store,” Winsight wrote.

They cited David Katz’s prediction that these stickier social effects of the pandemic will likely accelerate demand for “frictionless checkout” technology a la Amazon Go, or physical enhancements like expansive lobby areas or duly spaced “decompression zones” at the front of the store where customers can pick up center-aisle products.

Big funds eye sale-leasebacks

The pandemic’s long shadow has brought new thinking (and new capital) to grocery real estate investment in Europe, according to a September report from commercial real estate consultant Jones Lang LaSalle.

“Supermarket chains have been facing increased costs for some time as they adjust and reposition to long-term consumer shifts such as increased home delivery,” said Nick Compton, head of EMEA corporate capital markets at JLL, in that firm’s fall report. “So COVID-19 has really been an accelerating factor. The need for capital was already there.”

Pension and institutional funds have been keen to meet the capital demand, drawn by the potential for long-term, stable income flows bolstered by inflation-indexed rent adjustments.

Private investments in Europe have typically taken the form of sale-leaseback deals. Notable examples of late include German insurance giant Allianz acquisition, in partnership with Charter Hall, to acquire a portfolio of Australian grocery logistics properties valued at A$648 million (around $469 million) from global supermarket giant Aldi. In July, Supermarket Income REIT bought a portfolio of U.K. supermarkets from Waitrose & Partners for GBP 74 million (about $96 million)—adding to a grocery portfolio that includes a 25 percent minority stake in 26 Sainsbury’s supermarkets jointly owned with British Airways’ pension fund. And in September, LCN Capital Partners’ third European property fund bought 27 supermarkets across Spain from Spanish supermarket chain Mercadona in a long-term lease agreement (price details of the deal were not made public).

In the U.S., the Montana Board of Investments, which manages $20 billion in state pension assets, disclosed in August that it had doubled its allocation to the Sterling Organization’s U.S. grocery-anchored real estate fund to $60 million. The fund—Sterling United Properties II—is a discretionary, closed-end institutional equity fund that invests in stabilized or core grocery-anchored shopping centers in market majors where the grocer anchor ranks first or second in regional market share of “pure” grocers.

In the listed markets, a well-timed shift to grocery-anchored real estate by public REIT Weingarten Realty was credited with offsetting sales losses incurred by some of its other retail holdings during the most acute lockdown phase in the second quarter of the year.

And in July, one of the most expensive single-tenant grocery transactions on recordwas struck when Boston investment firm Eaton Vance paid nearly $71 million—$900 per square foot—for a property leased to a Chicago Whole Foods (a subsidiary of Amazon, which has cleaned up during the pandemic).

Meanwhile, in the VC lane

Data from agriculture venture capital firm AgFunder for the first half of 2020 revealed that eGrocery, the sub-sector that had benefited from more private equity and venture capital than any other agriculture group in 2019 with $3.9 million in investment, was on track for a repeat in the first half of 2020. As of June 30, $1.8 billion in capital had been committed to the space—20 percent of the total of all agtech capital—across 76 deals.

Meanwhile, investments in midstream technology, which includes logistics, traceability, and supply chain efficiency, came in at a respective number two for the period with $1.6 billion in investments and 119 deals in the first half of the year.

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