Retailers Eye Rising Interest Rates With Concern

Without a doubt, much of the first quarter of 2022 was good for retailers. Retail sales were strong and consumer spending remained solid. The quarter ended with a continuation of the investor demand, pricing and market activity that characterized 2021, Matthew Mousavi, Managing Principal, SRS Real Estate Partners, National Net Lease Group, told GlobeSt.com at the recent ICSC event. “There’s an incredible amount of capital and liquidity in the marketplace and investor appetite is strong, particularly from institutional profiles including funds, DSTs, and REITs, as many have capital allocation requirements and acquire on an all-cash basis,” he said. 

Not all of the quarterly developments were welcome to the industry, however. The Fed’s ratcheting up of the federal funds rates is a source of concern, especially with the guidance now pointing to 50 basis points or more in terms of increase. 

Credit spreads have widened in a material way, Scott Eisen, head of North American real estate at Citi, said in a session at the event.  “What we have had in an increase in the 10-year Treasury and a widening of credit spreads for pretty much every asset class.” Eisen also said that he expects credit spreads to come in from where they are today. 

But in the meantime, lenders are increasing interest rates at a level at which many investors, owners/sellers, and brokers, are unprepared for. “Cash on cash yield is an important metric for retail investment property, single and multi-tenant alike, and interest rate movement being quoted by lenders is starting to have an impact on cap rates and investor returns, notably, to buyer sentiment and confidence,” Mousavi said. 

Still, the strong fundamentals and ample liquidity outweigh the movement in interest rates, Mousavi continued. “While some pricing may shift to reflect a new interest rate environment on certain property and lease types, SRS NNLG continues to experience record demand and pricing on investment opportunities and anticipate the balance of the year to remain quite active, with property on market in 40 plus states.”