Green Street Finds Retail Sentiment ‘Overwhelmingly Positive’

Green Street met with a variety of retail owners and operators this month during the ICSC annual conference and found that sentiment was overwhelmingly positive on fundamentals with tenant demand remaining robust despite macroeconomic and recessionary concerns.

However, external growth opportunities are limited, which is frustrating management teams, due to assets for most US REITs trading at material discounts to net asset value.

Green Street said it will likely increase its fundamental forecasts “marginally” for malls and strips, but most recent estimates reflect the expectation that: 1) demand should remain resilient; 2) physical occupancy should continue to march higher in the coming years for most companies; 3) and leasing economics are improving, the firm said.

Leasing has not decelerated as retailers are taking a longer-term perspective that securing new brick & mortar stores in the right centers and trade areas is a profitable growth avenue with attractive unit economics. A potentially looming recession and trouble in the banking sector have not deterred them. Most expect a moderation in sales.

GlobeSt.com last week reported that the momentum of leasing and expansion continues, based on a panel during the ICSC conference.

Luxury brands, DTC expansion, and the F&B sector propel retail growth in NYC’s Midtown, for one.

Any negatively impacted overage rents at ‘A’ malls based on declining sales are incorporated into Green Street’s current NOI forecasts. In the ‘B’ mall space, fundamentals have been surprisingly resilient since COVID-19, especially for centers with less surrounding nearby competition.

“Near-term NOI growth for ‘B’ malls should only marginally lag that of other retail property types, which is intriguing given the much higher estimated cap rates on this segment,” Green Street’s report said.

Most of the backfills for Bed, Bath & Beyond and Toys R Us stores will be single-tenant users, which is a positive from a cap-ex perspective.

Retail transaction volumes are minimal, but there are many interested bidders and ample liquidity for smaller ticket strip center deals. Green Street said that “under $30 million is the sweet spot.”

The lowest cap rates in retail real estate are found in grocery-anchored centers on the West Coast and in the Sunbelt at the low- to mid-5% range.

Mall deals continue to be few and far between with minimal price discovery for ‘A’-quality malls.

“Obtaining permanent financing on malls remains a significant challenge for secured borrowers,” Green Street said. “Short-term loan extensions should continue to be a popular refinancing alternative to both borrowers and lenders in the current environment.”