[REN #965] Rent Growth: Tenants Pay More to Live Near Their Favorite Grocery Store

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The presence of a Whole Foods on the ground level of an apartment building provides a big bump in rental rates for landlords. There’s a new study that shows renters will pay a premium to live so close to a high-end grocery store. The so-called “premium grocer effect” also applies to single-family neighborhoods with an impact on home prices and equity, if there’s a favorite grocery store nearby.

The latest study by RCLCO Real Estate Advisors shows that renters will pay almost 6% more than the market rate if there’s a Whole Foods or Trader Joe’s in the building. (1)  RCLCO analyzed data from 64 apartment communities in 20 metros. Complexes with a coveted grocer on the ground floor were compared with similar complexes in the same area, but without a grocery store.

The study also found faster rent growth in those buildings, and absorption rates that are equal to or better than the area. The absorption rate is the rate at which vacant units attract new tenants, in this case, despite the higher rents.

“Premium Grocer Effect” on Apartment Buildings

RCLCO began looking at the impact that a grocery store has on an apartment building about four years ago. In that study, researchers found a rental premium but it wasn’t as much as it was for the second study. There was also a gap between Whole Foods and Trader Joe’s, with Whole Foods in the lead. The premium was 4.3% for Whole Foods and 3.2% for Trader Joe’s.

The latest results show Whole Foods and Trader Joe’s are now running shoulder to shoulder in regards to a rental premium. The rent for apartments with one of those stores on the ground floor run about 5.8% higher than similar apartments without a store. Other grocery stores are also producing a rent premium, but the average for other stores is 3.3%. Researchers say this demonstrates the ability of other lesser-known brands to “capitalize on this trend” in the future.

The study was done before the pandemic so it’s not clear how that might influence the results. One can only imagine that, with many people avoiding restaurants and cooking at home, that a nearby grocery store would become more beneficial right now. Having a grocery store right inside your apartment complex would be extremely convenient.

Study co-author Vahe Avagyan also believes that the benefits will continue over the long term. He says, “Increased grocer spending, coupled with an accelerating focus on health and wellness, could drive further increases in the premium that apartment renters are willing to pay to live in communities with direct access to premium grocers.” The study also warns that, “the presence of a premium grocer is no guarantee of higher rent growth.” That has a familiar ring to it. As we tell our investors, past performance is never a guarantee of future growth or success. But there is now a growing track record with regard to the “premium grocer effect” on real estate values.

Impact on Home Equity, Seller Profits, Flipping ROI

Attom Data Solutions did an analysis last summer on the impact of a grocery store on nearby home values. (2) The results show an increase in home equity along with a higher ROI if the home is to be sold. They also show that investors are getting better flipping returns and home appreciation.

The study analyzed average home values during a 5-year period from 2014 to 2019. Researchers used data on home equity, home seller profits, and home flipping rates within 1,859 zip codes. Each zip code had at least one Whole Foods store, one Trader Joe’s and one ALDI.

The results were separated into data for homebuyers and investors. For homebuyers, Trader Joe’s provided the highest realized average ROI of 51%. Those near a Whole Foods had an average ROI of 41%, and those with an ALDI, had an average ROI of 37%.

For investors, properties near an ALDI did the best. The average flipping ROI was 62%. That’s double the ROI for Trader Joe’s at 31% and almost double for Whole Foods, which had a flipping ROI OF 35%. ALDI’s also scored an average 5-year home price appreciation of 42% while Trader Joe’s got 33% and Whole Foods got 31%.

It’s not uncommon to feel that a Whole Foods or a Trader Joe’s might be adding value to nearby real estate, but what these studies do is quantify those benefits. It’s a good tool to have in your toolbox when you are deciding on the value of a real estate deal.

Links:

(1) RCLCO Real Estate Advisors Article

(2) Attom Data Solutions Article

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