🛒 Kroger-Albertsons Merger: California Impact

[rwsandiego]

The news articles saying that we are going to have a "glut" of luxury apartments and such go way back to 2015, and new ones are being written everyday but the developers keep building them. I'm convinced it is a way to milk their holdings for shorter term cash. Can't borrow much against the old "No Tell Motel" property that's falling down, but every dollar you invest in rebuilding it as a luxury apartment complex yields $3 in equity. Those paper gains can then be borrowed against. It's a gigantic house of cards. Yet I am completely baffled by the fact that I've seen more new megacomplex construction starts in the last 6 months than I have in the preceding 5 years. The developments are accelerating, and they keep getting bigger. Furthermore single family home starts seem to be down, replaced by multiunit townhome/condo starts. This is what I said when this merger first arrived out of left field, and I continue to say it - the real estate scenario in the urban parts of the west coast is a threat to the existance of both chains and merging is a way to get ahead of it.

Not to keep going off topic but there are also major tax incentives for these developers to build energy efficient dense properties and the incentives are in some cases contingent on the density of the property. Certain incentives you need a minimum number of units in the property to qualify for. The best tax code money can buy.

Some of these tax benefits can exist for commercial property too but you can make out like a bandit doing multi family development with those various energy efficient incentives.

There's no reason the "new" development can't incorporate retail, nor do they have to be "luxury" rentals. Christown Spectrum mall in Phoenix is starting its redevelopment and will include big-box retail and apartments. Likewise, Paradise Valley Mall is retaining the JCPenney and Costco stores, adding retail, and building apartments. Phoenix needs the housing, and this is a way to build it in an otherwise built-out area.

A good example of what a redeveloped shopping center can look like is Uptown Hillcrest, site of a Ralphs, Trader Joe's and myriad other stores. The parking lot is horrible, but that's because the shopping center is so busy.

There are several Vons locations in San Diego that would be good candidates for redevelopment into housing above the grocery store. The downtown Ralphs is another site that could accommodate housing and a supermarket, much like the Albertsons in East Village. Of course, it would require closing the store for redevelopment, which would affect the community.

[veteran+]

The news articles saying that we are going to have a "glut" of luxury apartments and such go way back to 2015, and new ones are being written everyday but the developers keep building them. I'm convinced it is a way to milk their holdings for shorter term cash. Can't borrow much against the old "No Tell Motel" property that's falling down, but every dollar you invest in rebuilding it as a luxury apartment complex yields $3 in equity. Those paper gains can then be borrowed against. It's a gigantic house of cards. Yet I am completely baffled by the fact that I've seen more new megacomplex construction starts in the last 6 months than I have in the preceding 5 years. The developments are accelerating, and they keep getting bigger. Furthermore single family home starts seem to be down, replaced by multiunit townhome/condo starts. This is what I said when this merger first arrived out of left field, and I continue to say it - the real estate scenario in the urban parts of the west coast is a threat to the existance of both chains and merging is a way to get ahead of it.

Not to keep going off topic but there are also major tax incentives for these developers to build energy efficient dense properties and the incentives are in some cases contingent on the density of the property. Certain incentives you need a minimum number of units in the property to qualify for. The best tax code money can buy.

Some of these tax benefits can exist for commercial property too but you can make out like a bandit doing multi family development with those various energy efficient incentives.

There's no reason the "new" development can't incorporate retail, nor do they have to be "luxury" rentals. Christown Spectrum mall in Phoenix is starting its redevelopment and will include big-box retail and apartments. Likewise, Paradise Valley Mall is retaining the JCPenney and Costco stores, adding retail, and building apartments. Phoenix needs the housing, and this is a way to build it in an otherwise built-out area.

A good example of what a redeveloped shopping center can look like is Uptown Hillcrest, site of a Ralphs, Trader Joe's and myriad other stores. The parking lot is horrible, but that's because the shopping center is so busy.

There are several Vons locations in San Diego that would be good candidates for redevelopment into housing above the grocery store. The downtown Ralphs is another site that could accommodate housing and a supermarket, much like the Albertsons in East Village. Of course, it would require closing the store for redevelopment, which would affect the community.

Great example!

I lived at the Uptown District. It was wonderful

[veteran+]

I'd still like to think that certain positions, such as mayors, should be non-partisan. So saying under another party goes nowhere with me. I'm in a highly productive city that solves problems and I have no idea what party the mayor is in, in fact the city rotates the mayor position around. For these big cities I can't help but wonder if they went back to that kind of system if things would not be a lot better. If you want to represent a specific political ideology then run for Congress, or the Assembly. By widening the net of the political parties on both sides nobody is winning.

What has changed is that the problem has spread across the entire county when it used to be concentrated in the downtown areas. The lack of fare enforcement on the transit system is turning them into mobile homeless shelters. In the past I rode the trains and busses in San Diego and they were clean and safe, but not anymore. They're just dispersing the homeless throughout the entire area now. It's a sad situation that is being accelerated by poor public policy just like Portland and Seattle. The laws passed to "simplify" building are just used by the developers to tear down the affordable properties that these folks live in and replace them with luxury high rises. The parking requirements that have been removed were supposed to make it easier to build from scratch but that isn't what the developers are doing since there really isn't any open space to do so. Instead it makes a old motel which previously couldn't be profitably acquired and replaced because of parking into a target for a luxury tower with a few "affordable" units which are still three times higher than the rents at the facility being torn down.

Trying to bring this somewhat back to topic, this is still one of the reasons why I believe Kroger is pursuing this merger, many shopping centers are still being shopped for development even today and it really doesn't matter how profitable the store is to the operator because the lease separation penalty fee is pennies compared to the profit that the developer will make even if half the units stay vacant for years. At my last company our Real Estate team had identified that development was a threat to nearly half of our West Coast stores and, wouldn't you know it, the threatened stores represented the top half of sales and profits. I can't imagine how many Kroger and Albertsons stores may be in the path of a bulldozer we can't see yet, which is likely a reason to consolidate especially since Kroger botched expanding when it was still easier to do so in these urban areas and is stuck now with a bunch of outdated, small and cramped SoCal Ralphs units, nothing in the bay except for FoodsCo, and a potentially expensive but lucrative opportunity with many Fred Meyer stores sitting on valuable land in the PNW.

Public transit systems lost many of their "commuter" riders during COVID as a result of work from home. But the homeless riders remained as they had nowhere to go. I am appalled by the condition of some public transit systems since COVID. I don't know where the police forces for these systems are but the use of taxpayer dollars to have people on these trains doing some of what they are doing with the drug use is appalling and I don't care if they need to put an officer on every train, cut train frequency to make it happen, close some of the cars, whatever, they need to get some control. Denver.... absolutely appalling what is going on within those trains. Also it spreads to fast foods near some train stops. Armed security at a McDonalds at Bellevue in Englewood due to issues caused by loitering. Stand there and watch the problem traffic and it comes straight from the trains and goes straight to the train. Denver trains - again- holy smokes. Portland light rail always was not great but now.... just no. The BART between Oakland Airport and into downtown San Francisco doesn't feel really any different to me than it ever did (but some of the stations around Oakland look even worse than before- I do not exit anymore and walk around downtown Oakland in the daytime as I once did). So I at this point have quit using these public transit systems for the most part and will not even consider them except that OAK BART-San Francisco. Anyway enough of that topic.

I don't think a lot of these developments that will take out a ton of additional shopping centers are going to materialize. Dense developments have been overdeveloped in many markets or are about to be overdeveloped and rent rates cannot keep rising forever. We may start to see it happen in larger cities again once larger cities get popular again (it will happen eventually... but it could be decades), but these dense developments in medium/suburb type locations often don't seem to work out too well.

I think the Denver characterization is a bit hyperbolized.

I have friends that use their transit system.

It depends where and when you use it. Most of the issues are downtown and some east side areas. On a scale of 1 -10 (10 being perfect) they all rate it at 5 to 6 average.

[ClownLoach]

The news articles saying that we are going to have a "glut" of luxury apartments and such go way back to 2015, and new ones are being written everyday but the developers keep building them. I'm convinced it is a way to milk their holdings for shorter term cash. Can't borrow much against the old "No Tell Motel" property that's falling down, but every dollar you invest in rebuilding it as a luxury apartment complex yields $3 in equity. Those paper gains can then be borrowed against. It's a gigantic house of cards. Yet I am completely baffled by the fact that I've seen more new megacomplex construction starts in the last 6 months than I have in the preceding 5 years. The developments are accelerating, and they keep getting bigger. Furthermore single family home starts seem to be down, replaced by multiunit townhome/condo starts. This is what I said when this merger first arrived out of left field, and I continue to say it - the real estate scenario in the urban parts of the west coast is a threat to the existance of both chains and merging is a way to get ahead of it.

Not to keep going off topic but there are also major tax incentives for these developers to build energy efficient dense properties and the incentives are in some cases contingent on the density of the property. Certain incentives you need a minimum number of units in the property to qualify for. The best tax code money can buy.

Some of these tax benefits can exist for commercial property too but you can make out like a bandit doing multi family development with those various energy efficient incentives.

There's no reason the "new" development can't incorporate retail, nor do they have to be "luxury" rentals. Christown Spectrum mall in Phoenix is starting its redevelopment and will include big-box retail and apartments. Likewise, Paradise Valley Mall is retaining the JCPenney and Costco stores, adding retail, and building apartments. Phoenix needs the housing, and this is a way to build it in an otherwise built-out area.

A good example of what a redeveloped shopping center can look like is Uptown Hillcrest, site of a Ralphs, Trader Joe's and myriad other stores. The parking lot is horrible, but that's because the shopping center is so busy.

There are several Vons locations in San Diego that would be good candidates for redevelopment into housing above the grocery store. The downtown Ralphs is another site that could accommodate housing and a supermarket, much like the Albertsons in East Village. Of course, it would require closing the store for redevelopment, which would affect the community.

First off, the building codes in California basically say you can't build anything anymore that isn't energy efficient, and the highest electric rates in the nation cause consumers to expect energy efficiency built in anyway as it's one of the few ways they can justify "upgrading" to a new house.

Second, the trend with mixed use has been minimal retail replacement. Sometimes a grocery store that is ground level with all underground parking which adds inconvenience for the customer plus we've talked about how some customers perceive garages as unsafe which lowers sales potential. The fact is that the value gap between residential vs. commercial is so far off these days that leaving much, if any, commercial space is like flushing money down the toilet for the developer (besides a "token" spot to claim the mixed use zoning, like a 7-Eleven or something). Phoenix and San Diego are not comparable in that regard.

I think that the outcomes are much better when the retailers control the process vs. participate in it or have it forced upon them. This is something that Safeway specifically had very good experience with internally through their subsidiary PDC which was sold off to Terramor around the same time as the Albertsons merger. I'm sure that the institutional knowledge is still present within the organization; I'm not familiar with any of these mixed-use Safeway redevelopments that have subsequently closed. Other chains have not been as successful with these types of urbanized locations; Whole Foods has closed several including Tarzana and Encinitas, and I could have sworn there were a couple of those types of units Ralphs operated that closed. Safeway is currently putting together one of these mixed-use projects in the Queen Anne area of Seattle which both got them $30 million dollars plus a large new space in the new property, and it appears that there will be a parking setup that isn't an afterthought or inconvenient for the customer like most of these properties. Now they're also working on the same deal for University Village in Seattle. I could see that intellectual property remaining with Safeway and potentially becoming another key incentive for Kroger to acquire the company in an effort to basically preserve their place on the West Coast and also potentially deliver billions in cash as they can lead the way to redevelop properties where they are not an afterthought shoehorned into a corner where they will ultimately fail.

[Bluelightspecial]

I disagree that Safeway (Albertsons) has any inherent expertise in California with mixed use developments over Kroger. Other areas like D.C. are different and are for a different board. The only "secret sauce" they had is they owned the property that they redeveloped, and they added additional retail. Any residential component was sold to a third party.. They then sold the property signing very favorable leases and future lease options for their stores. They did this in many sites in CA and WA and even HI. Whole Foods didn't own their properties. They signed some expensive leases on terribly designed mixed use properties. The Tarzana & Encinitas stores should be textbook examples of poor design. The underground parking and store access were terrible

[storewanderer]

I think the Denver characterization is a bit hyperbolized.

I have friends that use their transit system.

It depends where and when you use it. Most of the issues are downtown and some east side areas. On a scale of 1 -10 (10 being perfect) they all rate it at 5 to 6 average.

That 5 to 6 rating your friends give is anything but a strong endorsement. There are absolutely issues going out to Englewood/DTC now also (south). Never such issues before in my experience. Before COVID the system would be rated a solid 8 out 10... and the demerit would have nothing to do with safety or cleanliness (because there were few safety issues- I never saw any), it would have to do when the train breaks in the middle of the track going east (on the way to the airport) and you sit there for an hour or two for a replacement train or repair.

[retailfanmitchell019]

Going back on topic, I’ve thought of another divest candidate: Ralphs in Laguna Beach. I’m sure Kroger would want to trade that one for the Pavilions up the street, which has a pharmacy and is a larger box.
It will be funny when this one could have an Albertsons sign for the first time in 24 years, as C&S will use the Albertsons name in SoCal. This was a 60s gable Albertsons divested to Ralphs during the Albertsons/ASC merger.

[veteran+]

I think the Denver characterization is a bit hyperbolized.

I have friends that use their transit system.

It depends where and when you use it. Most of the issues are downtown and some east side areas. On a scale of 1 -10 (10 being perfect) they all rate it at 5 to 6 average.

That 5 to 6 rating your friends give is anything but a strong endorsement. There are absolutely issues going out to Englewood/DTC now also (south). Never such issues before in my experience. Before COVID the system would be rated a solid 8 out 10... and the demerit would have nothing to do with safety or cleanliness (because there were few safety issues- I never saw any), it would have to do when the train breaks in the middle of the track going east (on the way to the airport) and you sit there for an hour or two for a replacement train or repair.

Okay, but they have confidence in using the system. They just know when to use it and have not seen the level of what is being stated.

[storewanderer]

I think the Denver characterization is a bit hyperbolized.

I have friends that use their transit system.

It depends where and when you use it. Most of the issues are downtown and some east side areas. On a scale of 1 -10 (10 being perfect) they all rate it at 5 to 6 average.

That 5 to 6 rating your friends give is anything but a strong endorsement. There are absolutely issues going out to Englewood/DTC now also (south). Never such issues before in my experience. Before COVID the system would be rated a solid 8 out 10... and the demerit would have nothing to do with safety or cleanliness (because there were few safety issues- I never saw any), it would have to do when the train breaks in the middle of the track going east (on the way to the airport) and you sit there for an hour or two for a replacement train or repair.

Okay, but they have confidence in using the system. They just know when to use it and have not seen the level of what is being stated.

Know when to use it? So when don't they use it? Is it only usable before dark or something?

Only usable before 6pm?

That's not the best situation and again it wasn't like this before 2020.

I never tried it at midnight or anything but well into the evening 9pm etc. without issue before. Not the case anymore. Even weekends going south are more than sketchy.

[ClownLoach]

Going back on topic, I’ve thought of another divest candidate: Ralphs in Laguna Beach. I’m sure Kroger would want to trade that one for the Pavilions up the street, which has a pharmacy and is a larger box.
It will be funny when this one could have an Albertsons sign for the first time in 24 years, as C&S will use the Albertsons name in SoCal. This was a 60s gable Albertsons divested to Ralphs during the Albertsons/ASC merger.

They'll want to keep them both, because Laguna Canyon Road (CA-133) divides the city like the Great Wall of China. That is what they will argue and the traffic patterns will back them up as nobody wants to go through the congestion of Downtown. They serve two completely different areas, the Pavilions territory stretches into Newport Beach and Crystal Cove. It's a high income area so people are shopping out of convenience not price and thus nobody East/South of Laguna Canyon Rd. shops at that Pavilions. The Ralphs has exploded in business since the Albertsons in South Laguna was divested to Haggen and is now a very slow Gelsons (but I'm 99% sure they own the building so it'll stay open forever). The Ralphs is always busy day and night, while the Pavilions is dead after about 6pm. Two completely different clientele groups too, Ralphs gets the local residents who are rich plus the "beach party" customers while Pavilions doesn't as it's too far from the beach itself, the coast up at that end is at the bottom of sheer cliffs and limited parking. If Kroger could get Gelsons to give up that South Laguna store then I'm sure they could quickly remodel into a Ralphs Fresh Fare and triple it's sales volume. I'm sure Albertsons fought tooth and nail to keep that one, which shows you how idiotic and pointless zip code mapping is. 8 different zip codes cover Laguna Beach, but the dominant one is shaped like a wide letter "T" because it was "gerrymandered" to basically cover all of PCH from end to end which probably was out of convenience for the Postal service carriers who could just drive up and down the street. All the neighborhoods themselves are in extensions of zip codes from other cities like Laguna Niguel, Dana Point and so forth.

Make no mistake: if we ever get to see a list of divestitures from California, it will only be stores truly overlapping because they're directly across the street from other stores or within one or two blocks maximum. They're going to argue because of the very low market share in California that nothing is a valid argument of monopolizing an area except true overlap stores. Then they'll drag out the arguments and fight over every single unit. And frankly if they didn't take that approach then there's no point in merging because when it's all over they wouldn't have any more stores than they began with but they'd have another $20 billion in purchase expenses to pass along to the customers with nothing to show for it. It will be far easier to make these arguments in California than the PNW where their share is much higher since their Fred Meyer subsidiary has done such a great job of limiting market penetration of Target and Walmart. As discussed in the other threads the real battle ground for divestitures is Washington State where two or three Fred Meyers might do more revenue than a District of Ralphs stores and nearly every one is a few blocks from a Safeway, QFC, Albertsons or Haggen.