AMERICAS NEWS: TPG goes grocery shopping

Grocery-anchored strip malls generally are not considered ‘sexy’ like some other property types can be. But San Francisco-based private equity firm TPG’s real estate arm is betting that such assets, with their stable income, will be just as attractive as class A office towers.

Last month, TPG Real Estate announced it teamed up with a real estate investment trust, Phillips Edison Grocery Center REIT II, the largest player in this space. The duo is investing $250 million in value-added, grocery-anchored shopping centers throughout the US, starting with the acquisition of six properties.

Edison’s company has long operated under the thesis that the anchor of a grocery store brings customers to a local shopping center two to three times per week, providing stable net operating income regardless of the wider real estate environment.

“When there’s uncertainty in the market, a lot of investors go to things that have a resistance to both change and to potential recession,” said the REIT’s co-founder, Jeff Edison, in an interview with PERE. “We’ve got really good operating fundamentals and constrained supply.”

That dearth of supply comes from a lack of new construction. In the last three years, Edison said development for grocery-anchored strip malls hit its lowest point in 30 years, as the last building cycle stopped during the global financial crisis and never started again. Instead of building new stores, grocers have been putting capital into building upgrades and online strategies.

Edison also said the grocery-anchored strip mall is a suburban real estate model that resists technology disruptors such as online grocery delivery.

“Our story has always been that people are willing to drive 15 miles to get a $1 off a gallon of milk,” he said. “I would be betting more that Amazon would be a tenant of ours than that Amazon would destroy the grocery business.”