The appearance of a new Whole Foods Market or Trader Joe’s can be a contentious thing — a welcome neighborhood amenity to some, a sure sign of gentrification to others. The question is: Does the presence of a high-end grocer directly cause rent increases?
RCLCO, a real estate consulting firm, took a focused look at the topic, considering how a high-end grocer on the street level of a rental building affects that building’s initial rents, rent increases over a year, and the rate at which its new apartments are leased, known as “absorption.”
To do it, researchers compared 64 rental apartment building projects across the country with a Whole Foods, Trader Joe’s or other high-end grocer on the ground floor with similar nearby buildings without one. Adjusting for ways in which the buildings differed, they determined how much rent premiums, rent increases and absorption could be attributed to the presence of the store. (The study concluded in April 2020, so the effects of the coronavirus pandemic are not reflected in the results.)
Two takeaways emerged: Having a premium grocer in the building rewards landlords and, by these measures, the brand cachet of Trader Joe’s seems to have caught up with the competition.
A Whole Foods on the street level was found to raise initial rents by an average of 5.8 percent relative to comparable buildings — same for Trader Joe’s. That’s an uptick from 2016, when RCLCO’s study found a 4.3 percent rental premium for a building with a Whole Foods, and a 3.2 percent premium with a Trader Joe’s. Other high-end grocery chains had an impact on rents too, raising them by an average of 3.3 percent compared to similar properties without one.
Higher rent increases in buildings with a Whole Foods did typically follow the higher initial rents; less so in buildings with a Trader Joe’s. Absorption among buildings with any high-end grocer frequently exceeded that of comparable neighborhood buildings, but typically leveled off to the neighborhood norms within about 10 months, the report found.
Absent the affects of the pandemic, this is all good news for developers, who can see the rewards of luring a popular chain grocery. But for tenants who are already being squeezed out of a gentrifying neighborhood, the appearance of a Whole Foods or a Trader Joe’s in a new building — even if it’s not their building — could very well mean they have been priced out.