Uneven Recovery in Retail Market

Good morning,

Uneven recovery in retail market, European mall owner slows planned US exit, special servicing rates continue upward trend in August. Let’s delver into today’s topics.

📈 Market Update

🏬 Uneven Recovery in Retail Market

The retail real estate market has seen an uneven recovery over the past three years. Markets in the Sun Belt like Fort Lauderdale, Phoenix, and Austin have benefited from population growth and seen retail asking rents grow over 22% since 2020. Meanwhile, major urban markets like New York, Los Angeles, and San Francisco have seen below average rent growth, less than 12% since 2020, amid pandemic-related population declines. With limited retail space and high development costs, growing Sun Belt markets should maintain landlord pricing power if consumer spending holds up, while slower-growth urban markets will continue to lag.

🛍️ European Mall Owner Slows Planned US Exit

Despite previously stating plans to exit the US market by selling nearly all its malls in 2023, mall operator Unibail-Rodamco-Westfield is now slowing its retreat as top properties like Westfield Valley Fair in California post strong sales growth. With occupancy and foot traffic exceeding pre-pandemic levels at flagship malls, Unibail will hold onto its most valuable assets while gradually shedding poorer performing properties. However, debt reduction remains a priority, so asset sales will continue, just at a more moderate pace than initially planned.

📈 Special Servicing Rates Continue Upward Trend in August

Commercial mortgage special servicing rates rose again in August, increasing 5 basis points to 6.67%. The office sector saw the largest monthly increase at 39 basis points, while multifamily and retail rates also moved up and down, respectively. In total, $1.31 billion in loans were transferred to special servicing last month, led by office and multifamily assets.

✍️ Further Reading

• Amazon’s Makeover of Lord & Taylor Building Shows Challenge of Office Conversions (WSJ)

• Pandemic Population Boom in Rural Hotspots Sparks Resentment (BBG)

• Some Encouraging Signs in the Office Sector (GS)

• Six Metros That Are Financially Feasible for Office Conversions (GS)

• Industrial Players Are Heeding Yellow Warning Signs (GS)

• Nervous Lenders Retreat in NYC (RD)

• Adam Neumann Seeks Space at Building he Leased to WeWork (RD)

• MGM Resorts Investigating Cybersecurity Issue at Hotels, Casinos (WSJ)

📊 Chart of The Day