Delta Associates: More grocery stores are coming, but they face online competition

August 25, 2013

The Washington region has the lowest shopping center vacancy rate among large metropolitan areas at mid-year 2013. Overall vacancy for all types of shopping centers is 5 percent in the Washington area, as of June 30, down from 5.3 percent one year earlier. This compares favorably to the national rate of 8.8 percent.

Within what might be considered the region’s core — the District, Arlington and Alexandria — the vacancy rate stood at 4.5 percent for all types of shopping centers. Vacancy in the inner suburbs was 4.4 percent while vacancy in the outer suburbs was 6.5 percent.

The grocery evolution

Among retail options, the grocery business continues to undergo change.

There are 12 notable grocery-anchored shopping centers, totaling 2.8 million square feet, under construction or renovation in the area as of June. There are additional grocery-anchored shopping centers in the planning stages, some of which may be ready by late 2014 or early 2015. As lending continues to loosen, groundbreakings should gain momentum.

In additional to traditional stores, many alternatives are popping up. In 2005, specialty and high-end grocery stores captured just 6 percent of the market in the Washington area. However, in 2013, these types of stores represent 11 percent of market share. Trader Joe’s, an example of this type of store, will open its second location in the District – in the U Street corridor – in late 2013 or early 2014. Clarendon added a Trader Joe’s in 2011.

Online grocery shopping is also becoming more popular, particularly in crowded urban areas. In the Washington and Baltimore markets, the grocery delivery start-up Relay Foods received an $8.25 billion investment to expand its business. Meanwhile, shoppers who do not want to pay for delivery service can still order groceries online through Peapod (owned by Giant Food) and pick them up at a Giant Food store. New pickup locations are opening in Montgomery County and Centreville. Harris Teeter offers a similar in-store pickup service with a fee for online ordering. Of note, this approach turns a potential negative for traditional grocers (consumers migrating to online options) into a net gain (additional revenue from online shopping fees).

Many shoppers are likely to continue to value in-store shopping, but it should reflect a quality experience that competes effectively with the convenience and personalized nature of shopping online or at specialty retailers.

Retail market outlook

With substantial demand for high-quality retail space, property owners are likely to continue to invest, where the cash is available, in repositioning existing under-performing assets — either upgrading or transforming shopping centers. Currently, tenants seeking space are interested in newer space with significant foot traffic. Centers that focus on everyday needs, such as groceries and other necessities, remain successful during slow-growth periods. While the region’s low vacancy rate allows for new projects at this time, developers should be mindful of the competition presented by big-box retailers and online shopping. Consumers who venture to new centers are seeking an experience they cannot find elsewhere.

Sandy Paul is executive vice president at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.

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