The next decade of Ryan Sciullo’s career may look a little different than his first 15 years of selling grocery-anchored shopping centers.

Sciullo, a senior member of CBRE’s national retail group, specializes in shopping centers anchored by food retailers like Giant, Trader Joe’s and BJ’s Wholesale Club. As Covid-19 has accelerated a transition to online shopping — even for grocers, long thought to be an internet-proof category of retail — Sciullo thinks he’ll be selling hybrid retail-industrial properties before long.

That shift, highlighted this week by news that Simon Property Group  Inc. might convert mall spaces Inc. distribution centers, has major implications for other tenants populating grocer-anchored centers, from nail salons and Chinese restaurants to gyms and Tuesday Morning-type retailers.

Before the pandemic, grocery titans including Walmart Inc. and Kroger Co. spent hundreds of millions of dollars to make online ordering and curbside pickup a breeze for time-crunched consumers. It’s an investment that seems prescient in the wake of the novel coronavirus: U.S. online grocery sales jumped month-over-month by 9% to a record $7.2 billion in June, according to Brick Meets Click, an advisory firm that studies the crossover in food retail and technology.

Kroger, with nearly 2,800 U.S. stores, saw digital sales soar 92% in the first quarter; Walmart reported a 74% jump in e-commerce during the same span; and Albertsons’ 400 stores reported a 276% spike in its most-recent quarter.

The potential aftershocks are significant for smaller tenants that occupy grocer-anchored centers  that depend on grocers to draw in customers. Those tenants pay higher rents than they would at other retail centers because of traffic exposure — a premium that could evaporate should current trends in online shopping take hold.

“The question then becomes the rents,” Sciullo said. “If that does in fact become the case, what rents will the small shops be willing to pay … so they can exist?”


CBRE reported in July that retail-to-industrial property conversions have accelerated since the pandemic took hold, with 59 such redevelopments underway. In January that number stood at 24 projects.

Asset prices will determine whether the trend gains steam. With industrial rents roughly 25% to 30% below average asking rents at retail properties, developers will demand below-market prices before acquiring retail sites for industrial uses.

But will retail owners, stung by the pandemic and online  shopping, be desperate enough to sell?

“There have to be real changes at the property level for that to happen,” said Phil Voorhees, a vice chairman in CBRE’s private capital group. “The basis has to get reset to where the property is worth less or the industrial tenant is willing to pay a lot more.”

Pickup, not delivery, is the future of the grocery business, said Mark Thompson, who owns  based in Orlando, Florida. He cited Kroger’s use of Walgreens locations as pickup spots for online orders in Kentucky and Tennessee as proof that the convenience of traditional retail locations cannot be discounted.

“It’s just too expensive right now to pull off delivery,” he said, “and pickup strikes the balance of convenience and cost.”


The pandemic has accelerated what was already an industrywide shift from experiential stores to a more seamless, time-saving way to buy groceries. This spring, soon after the Covid-19 outbreak, Kroger began testing a pickup-only store in its hometown of Cincinnati, and Pittsburgh’s Giant Eagle converted two stores to pickup-only.

Experts say the pandemic also is accelerating a shift that, for the past decade, has hurt the restaurant industry. After the 2008-09 recession, consumers shifted 4% of their food spending from restaurants back to grocery stores, according to Symphony RetailAI, a retail consulting firm.

A similar shift now could result in $10 billion in additional U.S. grocery sales at restaurants’ expense, Lee Cummins, vice president of consumer packaged goods development for Symphony, said in an April report. Total U.S. grocery sales totaled about $680 billion last year, according to industry estimates.

In Florida, Kroger is skipping storefronts altogether. The grocer is under construction on a $55 million robotic warehouse near Orlando, where it will partner with British e-commerce giant Ocado to sell groceries strictly for online ordering. Kroger’s only physical store in Florida is in the beach town of Amelia Island, near the Georgia border.

“We don’t judge what you wear,” Kroger CEO Rodney McMullen said at a July 2019 groundbreaking for the warehouse. “When you shop online, the computer doesn’t care what you look like.”


The uncertainty facing small shops is reflected in the lack of grocery-anchored centers being brought to market, Thompson said.

May is typically the busiest listing month of the year for grocery-anchored real estate. In May 2019, 117 such properties came to market. The year before it was 115 listings. This year, 23 properties were listed for sale, according to data.

“No one knows if those shop-space tenants are going to make it,” Thompson said, “so if I buy your shopping center and most of it’s not even open, how do I know what I’m buying?”

In Thompson’s estimate, the pandemic has accelerated a transition to online grocery shopping by at least five to six years.

But landlords can find a silver lining: The online shift may trigger a change in perspective among grocery tenants. In Northeast Florida, for example, broker Carrie Smith said Mavis Discount Tire can’t lease parcels in Publix Super Markets Inc.-anchored centers because automotive is a restricted use.

“Grocers historically have limited certain types of uses because of parking or they thought it conflicted with their product offerings,” said Smith, managing partner of Franklin Street in Jacksonville, Florida. “I think there’s going to be a big shift in that.”

Smith points out that the vast majority of newly built, grocer-anchored shopping centers were already responding to pressure from e-commerce. Most newer centers have a fraction of the small-shop space that older centers do; 7,000 to 10,000 square feet is the new norm, whereas older properties might have 20,000 to 30,000 square feet.

Covid is accelerating that trend as well as other strategic changes in the grocery space, she said.

Voorhees, the CBRE vice chairman, agreed. “It’s all changing so fast. It’s like we’re so close to the blast, our ears are still ringing.”

Source: Sacramento Business Journal