Snapshot: What Leasing at Grocery-Anchored Centers Looks Like Right Now

How would you characterize the demand from potential tenants seeking to lease space at your centers?

We are seeing high retailer demand with no current sign of slowing. It’s a trend that was reinforced in the pandemic but really started a few years before that. The necessity-based, internet-resistant nature of our centers makes us attractive to a lot of quality retailers. Internet retail, in many ways, has actually helped our tenants, who we call neighbors, become more and more sophisticated in online ordering systems and other practices. It’s forced our fast-casual restaurants, for example, to get better and differentiate themselves from competitors who have not adapted. The categories of uses we are attracting has also really evolved, with so little space on the market.

How do your centers break down in tenant types?

We are 70% necessity based. This includes an average of 30% grocery, 20% restaurants, 16% personal services, 12% other essentials, 9% medical, 8% soft goods and 5% other businesses.

How much do your tenants benefit from your grocery stores’ foot traffic?

It creates a gravitational pull for them. Shoppers go to the grocery store 1.6 times a week, and they will often make multiple stops at other center shops. PECO’s three-mile trade area demographics are in line with the store demographics of Kroger and Publix, which are PECO’s top two neighbors. Our grocers drive strong and steady foot traffic to our centers, benefiting our small-shop neighbors. Customers also know that our centers are going to be clean and safe, which makes for a more desirable shopping experience and a better place for our neighbor tenants to be.

Tell us a little about the trend of grocery-anchored centers developing outparcel spaces. Are you experiencing much of that, and if so, what names are setting up shop there?

We’re seeing quite a bit of demand for developing and redeveloping these outparcels, particularly with the pace of new retail construction at an all-time low. Retailers are also getting more creative in the spaces they’ll take. For us, outparcel development is a huge advantage, especially if we own the land. That makes our numbers work much better. We’re doing about $50 million in development and redevelopment projects per year, with an average estimate yield between 9% and 12%. As for tenants, we’re seeing a lot of coffee concepts, such as Dutch Bros and Starbucks, as well as quick-service restaurants like Chipotle and Chick-fil-A.

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In this tight market, what are PECO’s rent growth and leasing spreads?

The numbers have been very favorable. Comparable renewal rent spreads for us reached 20.8% in our first quarter, with comp new-leasing spreads hitting just over 28%. Our inline local neighbors have proven to be especially resilient and remain in our centers an average of 10 years. Same-center [net operating income] growth increased by 3.9% in the first quarter alone.

How are macroeconomic trends like work-from-home, hybrid work and suburban demographic shifts impacting your business?

PECO continues to benefit from a number of positive macrotrends, including a resilient consumer, hybrid work, migration to the Sunbelt, population shifts that favor suburban neighborhoods and the importance of physical locations in last-mile delivery. Starbucks has become more active in the suburbs, for example. We operate where the grocers operate in the suburbs and are anchored by the No. 1 or No. 2 grocer by sales in a market. We’re still seeing across-the-board increases in overall traffic and sales.

Tell us about your “Locally Smart” leasing strategy of customizing tenant mixes to your centers’ immediate markets. How do you determine this?

With the right mix of national, regional and local neighbors, we create the optimum environment for sales growth for every neighbor at each center and community. We take a community-centric approach to ensure that our shopping centers will be welcoming to residents of the surrounding communities. It’s a multipronged effort. We rely on our property managers to get neighborhood feedback. We talk with construction teams who are connected to city officials, and we work with portfolio managers and others, then take all the feedback we receive and create the right merchandising mix for each individual center.

Your centers are 97% occupied on average. That’s a high number.

It is. Getting there has taken a lot of teamwork. We carefully monitor spaces that are coming available, as well as spaces where neighbors may be struggling, which helps us anticipate if we will be getting that space back. It all goes back to demand. We have an Atlanta center that is 100% occupied and has a waiting list of businesses who’ve submitted letters of interest to occupy any available lease space.

Your first-quarter-2025 report shows that your portfolio has just 15 vacant spaces exceeding 10,000 square feet, including closing Big Lots and Party City stores. How has leasing interest been on these?

Activity for these anchor leases is extremely positive. Examples of retailers who are showing interest in these spaces include T.J.Maxx, Sierra, Total Wine, Planet Fitness, Ace Hardware, Dollar Tree, Ulta Beauty and Kula Sports Performance.