Necessity and the Mother of Invention
Covid-19 lockdowns and anxieties have played havoc with assumptions for everyone, investors and business owners included. Owners of and investors in real estate worry about the ability of tenants to pay rents, a challenge that arises during every economic slowdown no matter the cause. One bright spot has emerged, that of grocery-anchored retail.
David Dunn, writing in RealAssetsAdvisor magazine (November, 2020), noted, “Viral crisis is compressing years of e-commerce growth and other innovation to a matter of months.” A need or challenge that encourages creative efforts to solve a problem is summed up in the proverb, “Necessity is the mother of invention.” The author of the proverb is unknown, but Plato in his Socratic dialogue, The Republic, circa 375 BC, proclaimed, “Our need will be the real creator.” For a real estate owner and investor, the need is a profitable return on investment, consistent dividends, growing value, an inflation hedge.
Real estate investment trusts (REITs) and other investment vehicles have made real property an important aspect of a diversified investment portfolio. Although the pandemic has raised questions about investments of all stripes, David Dunn observes, “While real estate investors have become skittish about the fast changing and hyper-competitive retail sector, grocery-anchored retail in particular has, by and large, been rock solid in its performance.”
Grocery-anchored retail centers around Atlanta are common, revolving around large anchor tenants like Publix and Kroger on long-term leases. The key is “necessity based” merchants and service providers, purveyors of non-luxury things needed on an ongoing basis like groceries, household supplies, fuel, haircuts, salon services, fast food, etc. Such vendors are deemed “essential,” illustrated by the fact that they were allowed to operate during the pandemic.
True to the real estate maximum about three keys to success being “location, location, location,” proximity to where you live is a factor in your shopping choices. Per hubspot.net, location is everything. For urban dwellers, there’s a limit to how far you will drive for everyday needs. Eighty-seven percent of consumers drive 15 minutes or less for essentials. The average driving time for groceries is 8.03 minutes; fuel, 6.01 minutes; fast food, 8.40 minutes; haircuts, 13.37 minutes.
It isn’t just about groceries. Major supermarkets may offer a bakery, on site prepared foods, sandwiches, a deli, perfect for busy moms, dads, or singles who don’t want to cook. Fuel centers, a pharmacy (generally one of the more profitable parts of a grocery store), an extensive wine and beer inventory, flower shop, enhance convenience.
The Roman Senator Seneca (4 BC-AD 65) philosophized, “Luck is what happens when preparation meets opportunity.” In 2012, California entrepreneur Apoorva Mehta founded Instacart, a grocery delivery service operating in the U.S. and Canada. Shoppers access the service online via website and mobile app. Personal shoppers select, pack, and deliver goods to one’s home or business. With the pandemic and sheltering in place orders, Instacart became an overnight booming success, making 33-year-old CEO Mehta a billionaire. Available to about 85% of American households and 70% of Canadian households, order volume has skyrocketed up to 500% in the past year with the average consumer spending up to 35% more per order. Specialty stores like butchers, seafood shops, bakeries, etc., also partner with Instacart.
Fast food tenants and neighborhood restaurants in grocery-anchored centers are doing strong takeout business with curbside pickup and delivery by DoorDash, Uber, and other services. As the pandemic wanes with wider distribution of vaccines and growing herd immunity, demand for such services is likely to continue given busy lives and the convenience factor. Despite the growth of on-line shopping, mega-giant Amazon, with their investment in Whole Foods 460-plus stores, recognizes the need for brick-and-mortar real estate as a competitive necessity. Technology will continue to augment the shopping experience with digital coupons, maps to grocery aisles, and online shopping lists.
Even with some big box stores or mall space now empty, the “mother of invention” is at work with the growth of urban agriculture. Growing food indoors in hydroponic cultivation facilities in or near urban markets is an expanding trend. Repurposing commercial real estate is likely to be a growing opportunity for real estate investors.
This column is for general information purposes and does not constitute an offer to buy or sell securities. Your investments should be based on your overall net worth, risk profile, liquidity needs, diversification objectives, tax bracket, time frames, and a customized investment policy framed within the context of a comprehensive and continuously monitored financial plan.