By Alan Hatfield
Phillips Edison & Company (Nasdaq: PECO) provides acquisition, leasing, and development services as a grocery-anchored REIT.
ExecEdge sat down with Chairman & CEO Jeff Edison to discuss the sector’s resilience in the face of disruption:
ExecEdge: Phillips Edison & Company owns and operates a portfolio of almost 300 grocery-anchored shopping centers across the U.S. What are the hallmarks of these shopping centers, and what is the benefit of focusing exclusively on this asset class?
Grocery-anchored shopping centers are defined by their largest tenants – neighborhood grocery stores. When classifying the types of tenants (or Neighbors, as we call them) that populate these centers, you’ll notice a common theme in that they’re all what we would classify as necessity-based retail. That would include your food and beverage operators, hair and nail salons, gyms and fitness studios, and medical uses, among others. For 31 years now, PECO has exclusively invested in well-located neighborhood centers anchored by the number 1 or number 2 grocer in the market, and the value of this investment thesis has continually proven itself out, as we have consistently outperformed the sector over the past 10 years. These shopping centers – and the grocers anchoring them – have remained resistant to disruption and continued to perform throughout market cycles, with strong macroeconomic tailwinds supporting continued growth.
ExecEdge: We’ve seen the grocery-anchored retail sector continue to perform in the face of significant disruption that brought other retail segments to a complete halt. In your view, what makes these centers so resistant to disruption?
It comes down to the necessity base of the retailers and the strength of the grocers. Customers make 1.6 visits per week to their local grocer, driving traffic to these centers. PECO focuses on owning and operating shopping centers anchored by the top 1 or 2 grocer in the market, and this is an important distinction to make. Leading grocers have been incredibly resilient in the face of disruption owing entirely to their own innovations. Whereas many other retail categories have had to reckon with disruption from e-commerce, grocers have kept pace with shifting consumer preferences, introducing tech innovations and conveniences that have led them to maintain the overwhelming majority of market share over their web-based counterparts, and they’ve made it easier as well for customers to purchase online for curbside/in-store pick-up and delivery. In fact, while consumers struggled to secure goods from online grocers at the height of the pandemic, local grocers flourished during that time, driving additional customer loyalty.
Furthermore, many of the in-line neighbors at our shopping centers provide goods and services that are harder or impossible to acquire efficiently online. We still see tremendous consumer demand for in-person fitness options, quick-service restaurants have done incredibly well and continue to bring forth innovative new ideas to accommodate consumer demand, and medical tenants are increasingly moving into shopping centers like ours for their prime locations in the hearts of the communities they serve.
We’re also seeing macro-economic tailwinds that support strong growth of these centers which are located within the communities, including increased work-from-home, suburbanization and a desire to buy local.
ExecEdge: What core macro trends are impacting grocery-anchored retail currently, and how is the sector evolving? What trends do you find most compelling as we look toward the rest of this year?
What’s really interesting is how certain trends that gained traction at the height of the pandemic are sticking around and seem to be here for the long haul. Suburbanization is a great example. Prior to the start of the pandemic, the suburbanization trend was just starting to take shape as elder millennials started seeking larger homes with more space to raise their growing families. The pandemic kicked this trend into high gear, and while we do see cities recovering from the mass exoduses we saw in the early days of the pandemic, there are also incredibly strong fundamentals supporting continued population growth in the suburbs.
We also have seen a rising urgency among retailers to get as close to their end consumers as possible, and this naturally leads them to shopping centers like ours. The need to get closer to end users is quite simple – it comes down to being able to be more conveniently accessible for consumers and to advance last-mile delivery strategies. Our brick-and-mortar real estate plays a key role in retailers’ omni-channel strategies and is complementary to e-commerce, including buy online, pick-up-in-store and last-mile delivery. We’re even seeing some traditionally larger-format stores including Petco, Kohl’s and Target, as well as mall-traditional tenants such as Macy’s, Bath & Body Works, Visionworks and Pearle Vision increasingly diversifying their portfolios with smaller-format stores to accomplish these goals.
Lastly, we’re really compelled by the trend of QSRs like Scooters, Dutch Bros., PF Changs, Salad & Go, Krispy Kreme, Jimmy John’s and others introducing no-dine-in and drive-thru-only locations to meet rising consumer demand for these types of offerings. What’s interesting to us about this is that it’s a trend that was more of a necessity at the height of the pandemic, but as consumers have acclimated to this style of service, it’s becoming more of a preference than a workaround.
ExecEdge: During the pandemic, much was made of the large numbers of people fleeing city centers for the suburbs, but we’re seeing cities come back to life. Does this concern you that the trend of suburbanization is starting to reverse? And if so, how might that impact PECO’s business?
Not at all. As mentioned, while we’re glad to see cities recovering, we do not see the trend of suburbanization reversing. There were strong macro tailwinds supporting a push towards the suburbs before the pandemic, and COVID really just accelerated the timeline. With rising remote and hybrid working models, people are not as chained to cities as they once were, and they’re starting to look at outer-ring suburbs as a new opportunity to gain the quality of life and perhaps lower cost of living they desire while still being close enough to their local city to get into the office when they need to. Ultimately, these trends point to people being in the suburbs more often, and proof of this theory can be found in the uptick in foot traffic and sales we’ve noticed during work days, suggesting people are taking more opportunities to pop out to grab lunch or run errands while working from home.
ExecEdge: Which types of retailers is PECO seeing the most activity and interest from, and how does that correspond with what consumers in your local communities are looking for?
Healthcare providers – which had traditionally been located in medical office buildings and other non-retail properties – are among the most active within PECO’s portfolio, reflecting their desire to be even more conveniently and efficiently accessible for patients as well as patients’ desire to have easier access to medical care. Further, providers such as One Medical, Pacific Dental, Humana and Carbon Health have also recognized the opportunity to leverage open-air retail storefronts to create an even more comforting, welcoming environment and experience. The “medtail” trend demonstrates the appeal of community shopping centers owing to strong visibility, high foot traffic and the ability to open quickly and efficiently.
ExecEdge: How are retailer interests/demands evolving, and how is PECO working to address these needs?
There are two common themes we can extrapolate from the trends we’re seeing across our portfolio, and those themes are proximity and convenience. Consumers want the easiest access possible to goods and services, and large regional indoor malls are no longer local enough. There isn’t enough land for retailers or developers to build closer to their end users, so the answer truly lies in the billions of dollars’ worth of neighborhood shopping centers across the country. This is why you see some stores switching up their formats to get into these shopping centers, and we’re seeing record foot traffic across our portfolio. We’re also seeing how retailers across all categories are focusing on expanding their omnichannel offerings, making it easier than ever to transfer goods from point A to point B. We’re working closely with retailers throughout our portfolio to help them introduce the options and formats – including curbside pick-up, multiple drive thrus and more – that consumers demand.
PECO sees significant growth opportunity ahead. We’ve had robust leasing activity and finished the first quarter at 96.2% occupied, up 140 basis points year-over-year. In addition, we’ve identified 5,800 shopping centers across the country that meet our strict investment criteria. With an investment-grade balance sheet and strong cash flow-generating portfolio, we are well positioned to execute on our growth plans.