5Qs for Phillips Edison’s Jeff Edison on the need for accurate merchandising in neighborhood centers
Phillips Edison & Company (PECO) CEO Jeff Edison has spent the last three decades of his life buying, building, and operating grocery-anchored centers across the expanse of the United States, but the core premise of his business hasn’t changed.
For his company to be successful, it needs to ensure that its tenants (or Neighbors as PECO calls them) have to be successful. Doing so means crafting specific merchandising at each of PECO’s 300-plus centers, paying close attention to what goods and services people want access to within three miles of their driveways. “Locally Smart” is PECO’s trademarked motto.
“We treat our center portfolio as if it were 300 different businesses,” Edison told Chain Store Age. Here’s more:
We recently interviewed PECO’s president Bob Myers about the paucity of available retail space, who told us that rents will have to go up substantially over the next 10 years to justify any significant new development. Do you agree?
It’s been an unusual year, but a really good operating year for us. We have continued high levels of occupancy and strong leasing spreads across our portfolio, and that tells us that retailers are choosing their leases based on the best cost of occupancy related to sales. On average, our Neighbors (tenants) have been with us for 10 years and running successful businesses. This allows us to have strong retention and rent spreads. I would add to that, having the No. 1 or No. 2 grocer as our anchor gives us additional security.
Are there any retailers you’ve seen backing away from quickly escalating rents?
Real estate is real estate, and supply and demand are the big drivers. When there’s less supply, landlords have more pricing power. But at the end of the day, retailers have to be making money on those higher rents, and that puts more pressure on landlords to push for the best possible merchandising in their centers. Retailers that have the best margins and sales can pay higher rents. That’s what’s going on right now, and what that’s doing is driving us to focus more on the merchandising side of the business.
PECO is always on the hunt for good centers to acquire in great markets. Have you considered building any centers in this time of historically low construction?
We believe opportunities remain in our portfolio today for continued ground-up development and repositioning projects, and we see increased opportunities with our acquisitions. But ground-up development is limited. There will always be specific locations where we might do some construction, but it will be anecdotal. There are retailers that will build on the outparcel of a popular center, like Starbucks, but that’s a small piece of our business.
Grocery-anchored tenants tend to be necessity-based. Have there been any new kinds of retail categories taking interest in neighborhood centers with so little space available?
The growth of medtail Neighbors in our centers is unique. It’s no longer just emergency care. It’s chiropractors, veterinary services, one-day surgery centers. We also see leasing demand from restaurants and health and beauty. Fitness centers in grocery-anchored centers used to be 20,000 square feet. Now there are a lot of boutique fitness brands that require just 3,000 square feet.
Do you note a new evolution of the grocery-anchored center’s purpose in this environment?
We don’t see any major repurposing of the centers outside of the natural evolution of retail. Our ongoing consistent success in leasing continues to be driven by the fundamental, strong demand for space across our grocery-anchored portfolio and targeted markets, demand that continues to come from necessity and service-based Neighbors. Currently, we see leasing demand from restaurants, health and beauty and medical, or medtail, as we call it. The demand is driven by what consumers want to have available within three miles of their homes.
The hard part about that for us is that every single market is different. They all require slight variations in the creation of the right mix of merchandising that will drive value. We call that being locally smart, treating it as if our center portfolio were 300 different businesses.
