As the maxim goes, the quickest way to a man’s heart (or a woman’s) is through his stomach. Similarly, it appears the quickest way to get higher rental rates from tenants is also through their stomachs. It’s called the Whole Foods Effect, which has shown that apartment buildings with a Whole Foods Market on the ground floor commands higher rents from tenants.
RCLCO, a real estate advisory firm, first researched this phenomenon in 2016 when it did a quantitative analysis that concluded apartments with a ground-floor Whole Foods tenant added value to the development by driving rental premiums, enhancing absorption and accelerating rent growth. Since that analysis five years ago, the high-end grocer market has changed in ways small and large, prompting the firm to re-examine the findings of its prior analysis. As a result of those market changes, 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 encore research found apartment communities with a Whole Foods on the ground floor achieve, on average, a rental rate premium of 5.8 percent 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, when the firm discovered a 4.3 percent premium when a Whole Foods Market was present.
The research also found communities with a ground-floor Trader Joe’s earn the same 5.8 percent premium as Whole Foods does. In 2016, the gap between buildings with Trader Joe’s and Whole Foods was significantly wider, with Whole Foods buildings drawing a 4.3 percent premium, a full percentage point higher than the 3.2 percent drawn by Trader Joe’s.
Other premium grocers in the 2020 report — including Sprouts Farmers Market, Fresh Thyme, Harris Teeter, and Fairway Market — were found to drive a lower but still meaningful premium of 3.3 percent.
One might consider an on-premises specialty grocer the amenity that beats all amenities at apartment developments — and further proof of the power of food to influence human behavior.
Read the full report, including its methodology, at this link: https://bit.ly/38txtfk
Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.