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Good morning. Grocery-anchored retail crushed it in 2022, exceeding expectations despite challenges in the debt markets. The sector had its second consecutive record year in 2022 with $14.7B in total transaction volume. In today's issue, we'll reflect on the success and examine the likelihood of this trend continuing in 2023.

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Grocery-Anchored Retail Has Another Record Year

Unfazed by the Fed’s aggressive rate hike campaign, grocery-anchored retail continued its dominance to close out a red-hot 2022. The sector recorded its second consecutive record year, with $14.7B in total transaction volume, up 16% from 2021, per JLL's US Grocery Tracker Report.

Bear Market: Major grocery chains reduced their reliance on delivery powerhouses like Instacart, DoorDash (DASH), and Uber Eats (UBER) while building out their online platforms. The seemingly “emerging” subsector of grocery delivery startups fizzled out, with companies like Gopuff and Fridge No More failing to deliver (literally) investor returns and Buyk even filing for bankruptcy.

First mover disadvantage: At the start of 2022, the spread between grocery-anchored retail asset pricing and interest rates was slim-to-none. As such, the sector was the first to feel the pain of the increased cost of debt. Per JLL (JLL), going-in yields on multitenant grocery centers expanded nearly 100 bps from a historically low average of 5.9% in Q1 2022.

Proof is in the pudding: Grocery chains aren’t all on the same footing, as evidenced by the yields they command. According to the Grocery Tracker report, Whole Foods anchors feature the most aggressive pricing, averaging a 4.9% cap rate. Sprouts and Publix are also in high demand but not quite as hot, trading in the mid-5s.

➥ THE TAKEAWAY

Why it matters: The COVID-19 pandemic revealed the crucial role of grocery stores in our daily lives, causing increased sales and longer visits due to online shopping and safety measures. This has made grocery store-anchored retail centers attractive to investors, with these trends predicted to continue.

Institutional investors took advantage of this opportunity, acquiring deals and decreasing private capital's share to 55%, their lowest in 5 years. One example is DRA Advisors' purchase of a 33-asset grocery portfolio from Cedar Realty Trust for $870M. Due to limited financing options, JLL predicts a decrease in average deal size in the near future.

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• Guac is still extra: Chipotle (CMG) is in expansion mode again. The burrito-joint is hiring 15,000 employees to fuel its expansion plans of doubling its footprint across the country.

• Turn to Chapter 11: Developer AD1 defaulted on a $165M loan collateralized by an eight-property portfolio of Florida hotels, spanning from Orlando to Palm Beach.

• Pass the Merlot: Weller Development Partners is planning the first Six Senses outpost in the U.S. for Napa Valley’s wine country.

• Can't beat the computer: According to a lawsuit from frequenters of Vegas, MGM (MGM), Caesars (CZR), Wynn Resorts (WYNN) and Treasure Island are colluding to overcharge for rooms through an algorithm created to maximize profits.

• Dropping like flies: Rents are falling in 5 major metros as interest rates rise, making renting a cheaper option than buying.

• Trouble in paradise: Starwood Property Trust (STWD) saw an $800M hotel loan go into special servicing, highlighting the distress in the hotel industry from business travel.

• Big buyout energy: Heidi Muller and three Arkansas-based investors bought out the Adventure Racing World Series organization.

• Crystal ball: Barry Sternlicht, CEO of Starwood Capital Group (STWD), predicts that a recession will hit the U.S. by the 3rd or 4th quarter of the year.

• Doom & gloom: Jason Oppenheim, President of the Oppenheim Group, predicts regulators may shake up commission structures, making sellers pay for both the buyers' and agents' commissions.

• On the prowl: Chicago employers are bullish on foreign tech talent – welcoming international workers with open arms.

ICYMI

Last Week's Highlights

📈 Chart of the Day

This map shows the top small and tertiary markets with high apartment development activity. Multifamily construction is thriving in various regions of the country, including both major and smaller markets, reaching multi-decade peaks.

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