CPE Asks: What’s Driving Demand for Small-Format Neighborhood Stores?
Alex Nyhan, CEO of First Washington Realty, believes investors will continue to search for spaces with small footprints. Here's why.
From urban convenience stores to experiential brand hubs, small-format retail spaces are redefining how businesses connect with customers as shoppers increasingly seek accessibility, personalization and efficiency.
These compact, strategically located stores—often grocery-anchored—are designed to enhance the shopping experience by offering curated product selections, seamless omnichannel integration and greater convenience.
Alex Nyhan, CEO of First Washington Realty—an investment management firm that specializes exclusively in grocery-anchored neighborhood retail and has a portfolio of 22.4 million square feet across 144 shopping centers—believes the increasing demand for flexible, small-format stores in key locations will continue to appeal to investors. Here’s what he told us about the retail trends influencing investment strategies in commercial real estate this year and beyond.
How are evolving market dynamics and technological advancements shaping the retail industry today?
Nyhan: All retail is not alike and the fates of neighborhood shopping centers and enclosed malls have diverged in recent years. Occupancy rates are higher for neighborhood shopping centers because they are around the corner and close to home, due to hybrid work, the rise of the omnichannel shopper and the flight of some tenants from mall formats to neighborhood centers.
Within the retail industry, tenants are getting more agile due to necessity. The reason they need to be more flexible is because there is very little vacancy and almost no new supply being constructed, and tenants want to be able to sell products from their stores but also fulfill online orders. If you are a tenant and you can pick between paying one landlord versus paying both a retail landlord and a warehouse landlord, many tenants prefer to just have the one landlord. As neighborhood shopping centers, we own the last mile.
In addition to flexibility on store size, tenants are also experimenting with AI. We are in the early innings, but I am excited about how AI can help our tenants deliver a better customer experience, manage inventory and possibly trim their cost-to-serve. These applications of AI should help tenants be more successful, which means we can be more successful.
How are retailers optimizing their store spaces to improve efficiency?
Nyhan: Retailers are always seeking ways to maximize the productivity of what happens within the four walls of their store. If they are able to be closer to the customer via a neighborhood retail center, the retailer will be able to maximize the throughput of online orders and facilitate experimentation of how to best optimize the space.
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Tell us more about investor demand for your grocery-anchored neighborhood retail spaces. Is there enough product out there available for acquisition?
Nyhan: The grocery-anchored retail asset is in demand for institutional investors and we see that playing out through transactions like Blackstone’s purchase of ROIC. Institutional investors like grocery-anchored retail for the same reasons we have invested in the category since 1983: People go to the grocery store in all economic environments, people still spend money in neighborhood shopping centers during a pandemic or an inflationary period because neighborhood shopping centers offer essential goods and services needed for everyday life. Investors also like grocery-anchored retail because cash flows are attractive, going-in yields are reasonable on a relative basis and the supply-demand dynamics are favorable.
Regarding acquisitions, there is never enough high-quality product for institutional investors because ownership in the sector is fragmented and many individual owners prefer to hold their assets over a long time horizon. Because of this, credibility and relationships are the key factors driving a successful acquisitions strategy. We have invested more than $4.3 billion in centers in the last several years and have been averaging about $900 million of transactions each year—so we are quite familiar with the buying and selling dynamics of this subsector.
Why do you see smaller format retail as a strong long-term investment opportunity?
Nyhan: The demand for smaller format retail at neighborhood shopping centers has withstood the ‘stress test’ of a global pandemic and inflationary pressures. These resilient fundamentals drive our conviction that this is a very appealing subsector for investment and institutional capital.
In the end, our business is simple: Find good real estate, grow rents and the attractiveness of the center with our team’s operational expertise and manage the amount of capital we inject.
Can you share an example of a major acquisition that contributed to your growth in the small-format retail sector?
Nyhan: In 2022, we acquired the former Donahue Schriber Realty Group, which allowed us to expand our portfolio to more than 20 million square feet of retail space serving more than 3,600 tenants across 22 states and Washington, D.C. This move positioned us to be a leading private, open-air real estate investor and operator in the country, with over 150 high-quality neighborhood and grocery-anchored retail properties in communities across the country.
Acquiring this portfolio was a great success and pivotal growth moment for us since it gave us access to a large swath of well-performing small-format retail centers and allowed us to swiftly expand our team with experienced and highly qualified professionals.
Demand for experiential retail has also grown a lot over the past few years. Have you seen increased demand for such spaces across your centers?
Nyhan: Dynamic, experiential retail is key to our shopping centers. For our retail strategy to be successful, we need to stay on the pulse of the trends shaping the communities we serve. This means actively seeking out and bringing in retail tenants that curate interesting, lively and diverse environments—whether food and beverage offerings, recreational or educational activities.
A good example of this is Level99, an interactive social gaming venue that we recently welcomed to The Corbin Collection, a shopping center we own in West Hartford, Conn. This first-of-its-kind destination offers a real-world, social challenge-based entertainment setting for adults featuring over 50 mental and physical challenges set in immersive artistic environments. In between fun and competitive play, customers can enjoy Detroit-style pizza, Connecticut-made beer and innovative cocktails at the adjoining Two Roads Kitchen & Tap restaurant. This tenant’s unique and playful approach supports our efforts to curate dynamic tenant mixes that drive meaningful activation and engagement at our centers.
Do you focus on specific regions for growth?
Nyhan: We are less concerned with particular regions or MSAs and focus more on the dynamics of the individual neighborhoods themselves. Our retail assets are usually located in well-populated areas with a highly educated demographic of consumers, thus making them more resilient amid economic shifts.
Speaking of shifts, is there any way you can ensure the resilience of your retail centers amid economic uncertainties?
Nyhan: We are not in the prediction business. We are in the business of owning and operating the best neighborhood shopping centers that do well when the economy is doing well and also when the economy is doing poorly. Our returns are not correlated in any material way with the performance of the broader market.
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