Regular readers are familiar with my outspoken advocacy of the study and application of retail strategy to apartment investment. Whether in commercial real estate or simply business strategy, cross-pollination of ideas can be very effective to influence creativity and spur growth. The retail world is replete with modern and sexy business strategies, yet we don’t often look to the staid, ho-hum world of the grocer to unearth conceptual underpinnings of a modernized real estate investment approach. Enter Whole Foods.
The ultra-healthy, uber-expensive grocer from Texas is known for stratospheric prices and as the only place one can find an ostrich egg on last minute notice. However, in certain circles it is also known for its real estate practices. Primarily well-known for the “Whole Foods Effect”, the theorized financially positive impact of Whole Foods moving into a neighborhood, business practices at Whole Foods transcend its prescient (or at least impactful) site selection into an array of thoughtful and modern practices.
Creating “There There” Before Others See It
Catching, or predicting, a real estate market right before an upswing is one of the greatest factors in asset appreciation and investment returns. Whole Foods has made a business out of helping grow emerging real estate markets. Dating back to Washington, D.C.’s Logan Circle store in 2000, or Boston’s Jamaica Plain store in 2011, or Midtown Detroit (yes, Detroit!) in 2012, Whole Foods’ prescience in site selection has resulted in significant asset appreciation both at the store level and for the nearby community.
Early entrance into a market that is about to “pop” is a tricky task, yet not impossible. Whole Foods’ repeated wins in this category suggest a replicable strategy. As nearby as Portland, another grocer in the natural and organic space has experienced similar results. Portland’s New Seasons Market continues to establish neighborhoods throughout Portland as the next “hot” real estate markets. Stores along Hawthorne, N. Williams and SE Division are fantastic proofs-of-concept and very much applicable to the Seattle market.
In the case of both Whole Foods and New Seasons Market, entrance into a new market is predicated in meeting demand, identifying social and economic fabrics that others don’t see and ultimately taking risk based on solid investment fundamentals. Looking around the Seattle and Puget Sound market these same fundamentals exist from downtowns in Bothell and Burien and as close to the core of Seattle as the Central District.
Curate the Millennial Experience
Earlier this month Whole Foods announced a new concept store targeting the millennial shopper. The new concept is introduced as an “and” strategy, meaning complementing their existing stores and providing lower-cost options to a generation nearly 90 million strong. The branding is focused on “modern, streamlined design, innovative technology and a curated selection to deliver a convenient, transparent and values-oriented shopping experience”.
The punch line is that Whole Foods potential customers cannot keep up with their pricing model and competition is on Whole Foods’ heels. In the context of apartment development and investment, if we are not yet having an issue with pricing and competition – we will certainly be there soon!
AvalonBay is a great example of a residential REIT creating a consumer-centric product line, their stratified Avalon, AVA and Eaves brands. Although this strategy has not yet been replicated by others in the apartment industry, it certainly raises some interesting questions about how to keep pace with customers and competition alike.
Similar to any mature business, Whole Foods must respond to competition. In the last two years its share price has plummeted nearly 40%, largely the result of competing grocers entering the natural and organic foods space. This precipitous drop in share price is not to say that Whole Foods has a poor business model or is the throes of a terminal death spiral. Yet, $40 vs. $65 share value, May 2015 vs. October 2013 respectively, is indicative of the direction any business can travel should it not stay on top of its game.
In Seattle right now we are staring down the barrel of a shotgun of 10,000 apartment units set for delivery in each of the next three years, with more to come– possibly many, many more. Nearly no number of new Amazon.com employees, nor finer granite counter tops nor silkier stainless steel appliances will provide the immunity from competing apartment offerings and affordability concerns.
Not unlike the natural and organic grocer industry, the apartment industry is maturing. Ownership is becoming more institutional, the product is more refined, higher-end and ultimately costly. All of this growth is coming at the same time that margins are shrinking, at least in the form of cap rate compression and more developers are building similar product at similar price-points. Responding to demand with innovation and differentiation are keys to continued success, especially as competition grows and pricing pressures mount.
Please give me a call to discuss innovative investment theses, how to position your apartment investments for the greatest return and why I too will be shopping at Whole Foods new, streamlined stores.