South Loop Mariano’s sold to Realty Income
The deal highlights the continued appeal of grocery stores to real estate investors, offering a measure of stability in an uncertain retail property market. Like other single-tenant properties, supermarkets present an opportunity to wager on a tenant’s credit, and they’re considered necessity-based retail well-protected from the e-commerce threat. Supermarket chains also are often locked into long-term leases, guaranteeing steady “bond-like” cash flows for a long time.
Shopping centers anchored by grocery stores also have held up well. In mid-June, a joint venture between WS Development and CrossHarbor Capital Partners, two Massachusetts real estate firms, paid $58.7 million for Plaza del Lago, a 100,200-square-foot shopping center in Wilmette anchored by a Jewel-Osco supermarket. The property last changed hands for $48.3 million in 2017.
Mariano’s stores have been a popular investment for a while, especially with Realty Income, which paid $235 million in 2017 and 2018 for six of them in the Chicago area and $77 million in 2019 for two more. An executive at Realty Income, which specializes in single-tenant properties, did not respond to requests for comment.
Mariano’s, now part of the Kroger chain, pays annual rent of $2.37 million for the South Loop Mariano’s, which opened in 2013, according to a marketing brochure from Newmark, the brokerage hired to sell the building. The rent increases to $2.47 million in October 2023 under the current lease, which expires in 2033 and includes options to extend it four times in five-year increments.
The property’s value likely jumped due to two factors: its expected rent increase next year and a lower capitalization, or “cap” rate. Cap rates are a key valuation measure used for income-producing real estate, representing a property’s net operating income—or rent in this case—divided by price. Cap rates fluctuate like bond yields, with a falling rate representing an increase in value, and vice versa.
In 2014, the South Loop Mariano’s sold at a 5.8% cap rate. The property sold last month at a 4.5% cap rate based on its 2022 rent, or 4.7% based on its higher rent starting next year.
Melohn, of New York-based Melohn Group, did not respond to requests for comment.
Owning other grocery stores has paid off for other investors. In a recent deal, an affiliate of Agoura Hills Financial in Southern California paid $17.7 million last month for a Jewel-Osco store at 1340 Patriot Blvd. in Glenview, county property records show. The sale generated a hefty return for the seller, an affiliate of Oak Brook-based Inland Group, which paid $12.5 million for the store in 2017.
Yet investors can’t count on grocery store values to keep on climbing. They could even fall, if the laws of real estate work as they have in the past. That’s because cap rates tend to rise as mortgage rates rise, and mortgage rates have been rising the past few months. If the trend continues, cap rates could increase, bringing values down.