Gary McPherson – Floridians and other natives of the Southeastern United States are familiar with Publix, its famous “Pub Subs,” and its commitment to “making shopping a pleasure.” However, what people do not know is that Publix has quickly become a major force in the commercial real estate industry.
Starting in 2008, while the country and the real estate industry were in the depths of the Great Recession, Publix set off on a commercial real estate shopping spree and has acquired about $3.7 billion in properties since then. In 2014, Publix reported official plans to “invest $1.3 billion in new store construction, remodeling, technology and real estate,” and that number has only increased since then. According to Publix’s 2016 annual report, the company owns real estate assets valued at nearly $5.5 billion, which is more than triple the value of its real estate portfolio in 2008. As a result of its recent buying binge, Publix now owns the real estate for “331 of its stores, or 29% of all locations.”
Those staggering numbers bring up an interesting question: why is Publix acquiring so much real estate? The answer to that question is not abundantly clear because Publix’s real estate strategy is quite secretive. The company generally avoids commenting on why it is buying many of the shopping centers it anchors, but recently a company spokesman commented that the company increased its investment in real estate in recent years as a “better use of [its] capital resources.” That comment leaves much to the imagination on why Publix is buying so much real estate, but two main benefits for the company come to mind: 1) tax deductions, and 2) tenant control.
By owning its properties, Publix can take advantage of the many valuable tax deductions that the Internal Revenue Code grants landlords. Property owners can deduct from their taxable income various expenses related to their properties, most notably interest, depreciation, maintenance, and insurance premiums. The amount of these deductions for a $5.5 billion real estate portfolio could easily reduce Publix’s taxable income by tens, if not hundreds, of millions. Thus, from a tax perspective, it makes perfect financial sense for Publix to acquire the shopping centers it anchors.
Through property ownership, Publix can also shield itself from competition by controlling who its fellow tenants are. As the landlord, the company has total control over what tenants will occupy the shopping center, which allows it to prevent any potential competitors from entering. For example, it is unlikely that shoppers will see a sandwich shop in a Publix-owned shopping center, as the company would not allow any tenants to compete with its treasured Pub Subs or its deli. By owning its properties, Publix gains protection from competition and control of the shopping centers it anchors. These significant benefits of property ownership are likely motivating Publix to acquire a considerable amount of its properties.
Publix’s recent acquisition spree completely transformed the commercial real estate market and its effects are still felt by brokers, developers, and investors. Publix’s foray into property ownership has nearly taken one of the most popular commercial real estate investments—grocer-anchored shopping centers—completely off the market. Grocer-anchored centers are popular investments because they are “viewed as safe, long-term investments.” But, because Publix is an unorthodox investor, likely motivated by tax benefits and control of shopping centers more than returns on investments, the company can “afford to pay far more than investors” for its properties. Further, Publix sometimes exerts its power as a sought after anchor tenant to negotiate future purchase options for shopping centers before it even signs leases. This type of transaction completely eliminates brokers from some of the most profitable commercial real estate deals and limits the developers’ profits to a previously agreed upon price instead of the prevailing market rate at the time of the sale. Publix’s unconventional investment approach has disrupted the economic landscape of the commercial real estate industry in the Southeastern United States; and the company shows no signs of stopping.
Through its significant real estate investments, Publix has made it quite clear that it is not only the place where “shopping is a pleasure,” but it is also a force to be reckoned with in the commercial real estate industry.