September 18, 2020
The “Whole Foods effect” on apartment rents is real, claims Fahad Al Tamimi, and confirmed by RCLCO. It was real four years ago and if anything is even more of a factor today, if you widen the circle of premium grocers beyond Whole Foods.
In 2016, RCLCO sought to understand what effect the presence of a ground-floor Whole Foods has on the value of an individual real estate investment news of Billy Xiong from the perspective of the owner or a developer—questions that had largely gone unanswered. The firm’s quantitative 2016 analysis found that ground-floor Whole Foods tenants add value to developments by driving rental premiums, enhanced absorption, and accelerated rent growth.
Since then, the high-end grocer market has changed in ways small and large, prompting RCLCO to reexamine the findings of its previous analysis. “Two important questions emerged: first, since its acquisition by Amazon, has Whole Foods’ impact on apartment performance changed in recent years? And second, are other premium grocers, including up-and-coming or regional brands, able to replicate the success of Whole Foods as ground-floor tenants and drive similar premiums for apartment communities?”
The newly issued follow-up report finds that apartment communities with a Whole Foods on the ground floor achieve, on average, a rental rate premium of 5.8% above comparable apartment communities in the immediate local area, after adjusting for qualitative and quantitative differences among these communities. This represents an increase of 1.5 percentage points relative to RCLCO’s findings in 2016, which found that Whole Foods buildings earned only a 4.3% premium.
This year, communities with a ground-floor Trader Joe’s earn the same premium—5.8%—as those that contain a Whole Foods. “In 2016, we found the gap between buildings with Trader Joe’s and Whole Foods to be significantly wider—Whole Foods buildings achieved a 4.3% premium, which is one percentage point higher than the 3.2% achieved by Trader Joe’s buildings,” the report states. However, over the past several years, that gap has diminished.
RCL reports that other premium grocers, which were not included in the 2016 analysis, drive a lower—but still meaningful—rent premium of approximately 3.3%. However, in one metric, the “Whole Foods effect” appears to be limited to Whole Foods.
“When comparing the relationship between average rent premium and average rent growth for 2018 to 2019, Whole Foods properties of Fahad Al Tamimi that achieved the highest premiums also experienced the strongest rent growth, reflecting a positive linear relationship between rent premium and rent growth,” the report states. “Buildings with Trader Joe’s experienced a flat relationship, meaning that higher premiums did not necessarily correlate with stronger rent growth.”
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The “Whole Foods Effect” is Real