Recently, rumors surfaced from a local blog that Whole Foods is considering opening a store on the 600 block of H Street NE, Washington DC. If true, it would mark another major milestone in the ongoing redevelopment of the H Street corridor. It also spurred me to think about what many now call the “Whole Foods Effect” on real estate and neighborhood development.
There is a debate amongst many in the industry as to whether Whole Foods is a driver of neighborhood growth or simply follows it. There’s limited research on this, but it’s useful to think about how a store like Whole Foods drives growth by looking at industry norms.
Whole Foods as Bellwether
There is little question that Whole Foods has consistently has been able to identify neighborhoods undergoing rapid upswings — Logan Circle Washington DC, Harlem New York, Jamaica Plains Boston, South Hills Pittsburgh, Central West End St. Louis, and soon Midtown Detroit. The retailer’s uncanny ability to open new locations just at a neighborhood’s inflection point is a testament to their market due diligence and an envy of most companies, investors, and governments.
Having personally negotiated with Whole Foods on development projects, I can tell you first hand that they take an unusual approach when evaluating a market. Unlike the typical retailer, and contrary to what you might expect, Whole Foods does not focus on household income but rather on education levels in a potential trade area. They usually require a minimum population of 200,000 with college educations. One of their brokers once told me, “Look, I don’t care what the incomes are; show me there are enough people there with degrees.” If you work at a nonprofit, a yoga studio, or in government, but still shop at Whole Foods, then you know that the Whole Foods customer is not defined by his or her salary.
But what does Whole Foods do to amplify growth?
In our research we found only one rigorous analysis of what amenities like Whole Foods do for growth. The study found that property values increase on average 17.5% after a specialty grocery store opens nearby, although specific amounts ranged per location from 5.8% to 29.3%. There is no doubt Whole Foods is a valuable amenity for local residents and workers, but in some ways the study makes a point that anybody in the real estate industry (or with a little common sense) would take as a given.
“Anchors” Drive Real Estate Economics
In the real estate industry, the term “anchor” is used to describe a business such as a department store, grocery store, cinema, or other major traffic generator like a convention center. An anchor creates value for the surrounding area because it is considered a destination, meaning that it will draw customers from significant distances coming specifically for that business. This large customer base will often shop, eat, and spend money at the surrounding locations, making proximity to an anchor extremely valuable.
This value creation can be seen very clearly in looking at a typical U.S. shopping mall. Small stores, called “in-lines,” like J.Crew, Victoria’s Secret, or Starbucks, may pay $45 per square foot in rent each year. In that same mall the “anchor” department stores would probably only pay $5 per square foot in rent (or potentially $0).
Property Economics - Small Stores vs. Anchors
Not only do most anchors pay virtually no rent, but some are so highly valuable to larger developments that property owners will actually provide millions of dollars to cover the cost of construction (i.e., a subsidy). Companies like Nordstrom have been paid as much as $40 million to open in a new location because of how valuable the surrounding space becomes to the developer in terms of leasability.
In large-scale private development, the anchor is heavily subsidized by the surrounding real estate economics.
A shopping mall is the suburban equivalent to an urban commercial corridor. For DC residents, think of places like Reston Town Center and Tyson’s Corner Mall as the equivalent of Logan Circle or Georgetown. However, unlike a suburban mall development, most of the economic benefits of having an anchor do not accrue directly to the single property owner but instead to the hundred or potentially thousands of people who own property in the surrounding neighborhood. Nearby space becomes easier to lease at higher rents. And not just retail space but also residential and office properties see a great deal of increase in value.
The Bottom Line
Whole Foods is an anchor and one of the best there is. A new location on H Street would bring tons of new consumer traffic to the area, which in the real estate sector is good—it means many more customers for local businesses. In turn, this leads to a plethora of new stores opening, making the neighborhood a more desirable place to live, and ultimately increasing the value of all property in the neighborhood.
If the rumors turn out to be true and Whole Foods does come to H Street, be sure to thank the developer. It will likely cost them a pretty penny, and everyone else will get to share in the benefits.
What would you think if Whole Foods came to H Street? Leave a comment below.
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