Grocery Store Investment Should Accelerate Over Next 18 Months

Article originally posted on Globe St. on March 1, 2024

Grocery retail investment volume experienced a significant decline in 2023 that was felt among all core real estate property sectors. A new report from JLL suggests a reversal of fortunes in 2024.

Grocery retail properties benefit from anchor tenant stability, favorable lease terms, and a reliable cash flow, making them an attractive investment option, according to JLL.

“Anticipate an acceleration in grocery retail investment activity over the next 12 to 18 months, supported by robust investor demand and growing optimism surrounding expected interest rate cuts in 2024,” the firm said.

In a year with a challenging transaction environment, total investment volume decreased to its lowest point in 12 years (when excluding data in 2020), reaching $7.5 billion last year, for a 53.6% decline compared to the prior year and 35.8% from 2019. The average deal size for grocery retail transactions decreased by 16.6% year-over-year in 2023.

In response to the economic uncertainty, investors had shifted their focus toward smaller deals, resulting in fewer portfolio and large transactions. However, investor confidence has been revitalized by the hopes of potential rate declines in 2024.

“As a result, going-in cap rates across all retail subtypes, including grocery retail, have stabilized,” JLL said.

Since Q3 2022, going-in yields for retail properties have remained within the range of 6.7% to 6.9%.

“We expect the potential for some rate compression as rate cuts start,” JLL said.

Furthermore, in 2023, multi-tenant grocery retail again demonstrated consistently lower yields compared to all other retail subtypes.

JLL said that relative to larger format, power center retail, which commands the highest yield at 8.6%, multi-tenant grocery was 170 bps lower.

“This can be attributed to strong investor demand driven by its low-risk profile,” according to the report.