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3 ways the Amazon-Whole Foods merger could impact real estate

July 31, 2017 Article 2 min read

Retail real estate investors should stay alert for real estate investment opportunities — and fallouts — as Amazon leverages its strong market positioning and newly acquired real estate to rapidly evolve the grocery retail business.

exterior of shopping center at night with cart in the foreground

The announcement of Amazon's acquisition of Whole Foods was met with surprise and excitement across the retail industry — as well as the real estate industry.

Many people are hypothesizing why the companies made this market-altering decision, but one answer seems concrete: With Amazon's strategic acquisition, a massive gauntlet has been thrown into the grocery delivery service industry.

With this disruptor climbing into the ring, retail real estate investors should stay alert for real estate investment opportunities — and fallouts — as Amazon leverages its strong market positioning and newly acquired real estate to rapidly evolve the grocery retail business.

The benefit of brick and mortar locations

Amazon's motivation for adding to its brick-and-mortar portfolio is rooted in its desire to improve the "last mile" logistical hole that the company has been challenged with for many years. Since Whole Foods' locations tend to be in urban, high-density areas, Amazon's grocery delivery unit can leverage the existing portfolio to increase its consumer base and greatly improve the efficiency of its grocery supply chain.

The accessibility of these physical storefronts to high concentrations of the population will allow products to be quickly and efficiently distributed to their final destination — especially compared to traditional distribution networks, which concentrate goods in large warehouses often 10 to 20 miles from CBD consumers. This should allow Amazon to significantly increase its competitiveness with grocery delivery competition (such as Peapod) and traditional grocers (such as Kroger) who have recently added grocery pick-up to aid consumers.

But how will this transaction affect the real estate market?

Gauging the effects on retail real estate

The re-engagement of retail space as part of a retailer's distribution network could have a significant impact in three main ways:

  1. While big-box and traditional storefronts struggle — especially in secondary and tertiary markets — well-located retail stills provides integral access to consumers, increasing demand for facilities close to population centers.
  2. Changing configurations and space use of retail will drive smaller showrooms and larger spaces for inventory. This will likely drive down retails rents as more space is utilized for storage.
  3. We can expect further M&A activity as e-commerce companies, including Amazon, seek to solve the last mile conundrum. Retail real estate might be the best solution.

We know a few answers to the questions revolving around this merger, but there are still a few considerations yet to be uncovered. How will this strategic acquisition impact grocery stores and grocery delivery services going-forward? How will Amazon and other e-commerce companies use a similar model to take advantage of well-located retail properties to improve delivery times for non-grocery related goods?

The answers to these questions are forthcoming, so we recommend investors carefully evaluate their investment real estate to better understand the locational strengths and market positioning.

Plante Moran REIA is uniquely qualified to assess your real estate investment portfolio and position you for positive outcomes. If you're interested in learning more about what you can do to align your assets with what's happening in the industry, let's have a conversation.

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