REAL ESTATE NEWS

One trend has been gaining momentum across the San Francisco Bay Area — the growing amount of space that is going to Asian and Hispanic grocers. During the past 18 months, these retailers have quietly signed leases for approximately 850,000 square feet across the region, according to a report from JLL.

Institutional investors who historically viewed these specialty grocers as niche plays are now aggressively competing for assets in Emeryville, Dublin, Daly City and San Jose, among other locations.

Since 2023, specialty Asian- and Hispanic-anchored grocery centers along the West Coast have traded at an average cap rate of 6.1, effectively matching or exceeding pricing for traditional grocery-anchored properties.

In fact, Westborough Square in South San Francisco, anchored by Pacific Supermarkets, traded at a 6.1% cap rate and $536 per square foot last December. This is an example of core institutional-quality pricing for what some might have dismissed as a secondary concept just five years ago, according to Eric Kathrein, managing director of JLL.

Pleasing Demographics

The Bay Area's demographic shifts provide the foundation for this investment thesis. According to recent industry research, the Asian population in the US reached nearly 25.8 million in 2024, representing 7.7% of the population, while Hispanic residents grew at 2.9% annually.

More significantly, Asian American households earned a median income of $105,600 in 2023, which is well above the national average. They also tend to spend 39% more on home food consumption compared to non-Hispanic/white households.

"This isn't simply about serving specific non-white communities," Kathrein told GlobeSt.com.

Data from Circana shows that sales growth in the Asian/ethnic aisle at US supermarkets was nearly four times that of overall grocery sales from April 2023 to April 2024.

"Younger, more diverse consumers are driving demand across demographic groups, expanding the addressable market well beyond the traditional customer bases," he said.

These operators are demonstrating flexibility. The recent Bay Area openings showcase tenants filling spaces ranging from 14,000 to 100,000 square feet.

One example of this broad trend includes Tokyo Central backfilling a 40,635-square-foot Amazon Fresh box at Bay Street Emeryville. Others are H Mart taking over the former 100,000-square-foot Kohl's in Fremont and Jagalchi converting a 75,000-square-foot JC Penney at Serramonte Plaza.

"This adaptive reuse solves retail real estate's persistent challenge of what to do with dark boxes left behind by department stores and big-box concepts," according to Kathrein.

"These specialty grocers are paying competitive rents while breathing new life into centers, often triggering a complete repositioning of the surrounding inline spaces."

Top REITs Showing Interest

Kathrein said perhaps nothing signals a sector's maturation more than institutional ownership composition.

The specialty grocer openings tracked across the Bay Area include properties owned by Kimco, Regency Centers, Federal Realty, Acadia Realty Trust and PGIM.

"These are core holdings by some of the most sophisticated retail REITs in the country," he said, adding that capital markets' response validates this shift.

When Chino Spectrum Town Center, anchored by H Mart, traded last December at a 6.33% cap rate for $138 million or roughly $299 per square foot, institutional buyers weren't applying a specialty grocer discount.

Similarly, Santa Ana Center, featuring Northgate Market, commanded a 4.9% cap rate in June 2024.

"These pricing metrics reflect confidence in cash flow stability and often, significant growth prospects," he said.

The Operator Confidence Signal

Another telling indicator is that the grocers themselves are acquiring properties.

H Mart exercised its option to purchase Oceanview Village in San Francisco for $37.1 million in May 2024, a center that it anchors. Pacific Supermarket acquired Westborough Square after exercising its right of first refusal following a full marketing process. Mega Mart previously acquired Gateway 101 with the intent of opening once a space became available within the center.

"When tenants become landlords, it signals deep conviction about the viability of both their retail format and the underlying real estate," Kathrein said.

He said this operator confidence stems from fundamentally different customer behavior patterns.

Industry research indicates that customers at these specialty supermarkets make more frequent weekly trips compared to traditional grocery shoppers. Higher visit frequency translates to increased traffic counts for co-tenancy – a metric that matters enormously for inline shop tenants and overall center performance, he said.

The Value Creation Equation

For investors evaluating this segment, several factors distinguish specialty Asian and Hispanic grocers from traditional anchors. The product assortment extends beyond standard grocery offerings.

"These stores function as cultural destinations carrying hard-to-find ingredients, imported goods and freshly prepared foods that drive impulse purchases," Kathrein said.

"This differentiation creates pricing power and customer loyalty that translates to sales volumes that often exceed traditional grocers on a per-square-foot basis."

The expansion shows no signs of slowing. T&T Supermarket has announced three Bay Area locations totaling approximately 154,000 square feet across San Francisco, San Jose and Millbrae. Additional concepts continue to emerge, with Indian grocers exploring locations totaling 70,000 square feet in Dublin and East San Jose.

Source: GlobeSt/ALM