“Covid was the greatest stress-test ever for retail,” is what the CEO of a national shopping center ownership group told me earlier this month. That CEO, like nearly everyone else I speak to, is bullish on retail. He recently convinced his board of directors to increase the company’s spending budget for the remainder of the year from $1B to $1.2B. This euphoria over buying retail properties was echoed by three different CMBS loan originators I’ve spoken with in the past two weeks. All of them want to lend on retail.

Unfortunately, those same lenders have set lower loan-to-value ceilings than we’ve seen in the past.* The resulting equity gap poses an undeniable challenge, yet buyers are showing a willingness to put in the additional equity to get the assets they believe they should have. They’ll refinance later if interest rates come down. There also seems to be a price threshold where interest rates become much less impactful. I’d say that number is $10M in Manhattan, with lower figures in the boroughs.

His biggest current challenge as a buyer is the slow pace of the pricing discovery process

The existence of those thresholds highlights the critical importance of pricing discovery. The CEO quoted above noted that his biggest current challenge as a buyer is the slow pace of the pricing discovery process and when things go South, that tends to happen quickly. Cap rates are great as far as they go, but they are a backward-looking metric, so coming up with a value for a retail property is a murky business these days. We are experiencing this challenge in NYC as well, although things are gradually getting clearer.

As a core policy, I never tell people when they should or should not sell. Each person’s or company’s internal situation is unique to them. Nevertheless, the fundamentals of retail look great right now. All appropriately priced assets have multiple offers on them, lenders want to lend, and buyers want to buy.

*All three loan originators mentioned above are lending at about 55% loan-to-value, with rates in the high 6’s on a 30 yr. amortization schedule.