If you are reviewing site packages or preparing a committee deck, real estate debt headlines probably look alarming. The reality across retail properties is very different. Trepp's September report found retail delinquency fell 62 basis points to 6.58% while the overall rate rose to 8.02%, its highest since November 2020, making retail the only major property type where delinquency fell.
That split matters when you evaluate lease renewals or bid on open boxes. The loan distress in the headlines belongs to other property sectors.
Retail was the only property type where distress fell
Trepp's table shows where property loan trouble climbed. Office delinquency rose 16 basis points to 12.16%. Multifamily rose 35 to 8.04%. Lodging rose 34 to 6.18%. Industrial held steady at 1.14%. Retail fell to 6.58%, as shopping mall owners caught up on loan payments.
The overall rate rose 17 basis points, driven largely by five big loans that fell behind: a $1.10 billion studio-and-office portfolio in Los Angeles, a $470.0 million two-tower office complex in Houston, a $280.0 million beachfront hotel in Santa Monica, a $230.1 million office loan in Denver, and a $208.9 million single-tenant office loan in Silicon Valley. Every one of those troubled loans was an office, studio, or hotel property.
Retail's 6.58% delinquency rate still sits above lodging at 6.18% and industrial at 1.14%.
When a specific center looks distressed, skip the sector numbers and look at its own tenants and its own loan.
Buyers are paying for necessity space
Trepp's Q2 price index, released October 7, found retail was the only property type whose prices rose across both of Trepp's pricing benchmarks. Retail gained 0.57% on the quarter, while the overall index dropped 0.70% and office fell 2.41%. Trepp puts that down to limited new construction and steady demand for grocery and everyday service space.
Buyers are paying up for centers that stay full. CTO Realty Growth bought a 545,000 SF power center outside Kansas City for $103.0 million, or $189 per square foot. CTO's CEO described the property as nearly 100% occupied with in-place rents below market rates.
Institutional capital is committing for the long term as well. In an announcement on October 1, Phillips Edison extended its joint venture with Northwestern Mutual by 10 years to 2036. PECO is contributing 13 grocery-anchored centers, valued at about $377.5 million, into the venture.
Shoppers are showing up, too. Placer.ai's September Mall Index showed visits up year-over-year by 5.6% at open-air centers, 5.5% at indoor malls, and 4.1% at outlet centers. Placer noted that Labor Day weekend fell fully in September, boosting monthly totals.
When a buyer calls a full center's rents below market, expect to hear the same argument at your renewal. Pull the rent on every grocery-anchored and power-center lease coming up for renewal, and plan for the landlord to ask for more.
Higher interest rates threaten property prices, retail's included
The Federal Reserve raised the benchmark rate by a quarter point to 3-3/4 to 4 percent at its September meeting, according to the FOMC minutes released October 7. Most participants saw another rate increase as likely appropriate before year end. Interest rates on Treasury bonds from 2 to 10 years rose about 0.35 percentage points.
Green Street's Commercial Property Price Index slipped 0.1% in September, leaving it up 4.7% over twelve months. Peter Rothemund, Green Street's Co-Head of Strategic Research, said: "If this rise in yields sticks, property prices are likely to go down." He added that "pricing for sectors with solid fundamentals is likely to hold up better than pricing in sectors with limited growth."
Trepp's price release also flags rate increases since June as a challenge for both prices and deal volume.
Retail is ahead of other property types, and Green Street says prices are likely to go down if the rise in rates sticks. Rerun your deal models at today's rates plus one more hike, and don't treat retail's lead as protection.
The distress is in the tenant
October brought a wave of store closures across regional and national chains. Chip City, a New York cookie bakery chain, closed all 24 of its stores in one evening, telling staff by email they would not be needed the next morning, QNS reported. True Food Kitchen, a restaurant chain, filed Chapter 11 on October 4 and closed 12 locations that day. Haynes Furniture and The Dump are closing 12 stores between them, four Haynes locations and eight The Dump locations. Grunt Style is closing at least 10 of its 13 stores, the Express-News reported. Ikea confirmed it will close 3 small-format plan and order stores in the DC area.
Each of these closures reflects a specific brand pulling back, separate from September's broader improvement in retail property loans. A dark storefront in a center with a strong anchor and full occupancy is a very different opportunity from a vacancy in an underperforming property.
For real estate teams pursuing expansion, fresh vacancies in healthy centers are where you can move quickly. Well-located boxes draw competition, so the work is deciding fast which locations justify an offer. Inspect the trade area demographics, foot traffic patterns, and co-tenancy around each vacated box before making a move, which is the analysis GrowthFactor runs for expansion teams.
Don't underwrite broad distress in retail. Judge each vacated box by its own center, its tenant mix and its debt.