What Apartment Investors Can Learn From Whole Foods

by | 10 June 2015

You may be familiar with my outspoken advocacy of the study and application of retail strategy to apartment investment. Whether in commercial real estate or simple business strategy, cross-pollination of ideas can be very effective in influencing creativity and spurring growth. The retail world is replete with modern and sexy business strategies. 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.

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The health-conscious 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. Take, for instance, the “Whole Foods Effect,” the theory that there’s a financially positive impact if Whole Foods moves into a neighborhood. Because of this, it’s worth paying attention to Whole Foods’ thoughtful and modern practices beyond its prescient and impactful site selections.

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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. In 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 markets like Seattle.

In the case of both Whole Foods and New Seasons Market, entrance into a new market is predicated on meeting demand, identifying social and economic fabrics that others don’t see, and ultimately taking risk based on solid investment fundamentals. In Seattle and other Puget Sound markets, for example, these same fundamentals exist in 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 has been introduced as an “and” strategy — 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 the store’s 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.

Competition

Similar to any mature business, Whole Foods must respond to competition. In the last two years, its share price has plummeted nearly 40 percent — 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 in the throes of a terminal death spiral. Yet, the difference between $40 and $65 per share, from May 2015 to. October 2013 respectively, is indicative of the direction any business can travel when it does not stay on top of its game.

In Seattle right now there are more than 10,000 apartment units set for delivery in each of the next three years, with more to come — possibly many, many more. No number of new Amazon.com employees or fine granite countertop or silky stainless steel appliance will provide 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, and 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.

Dylan Simon is a hobbyist technophile and self-taught urbanist. For more, follow his blog and connect with him on Twitter and LinkedIn.