Today’s release of the April Fed meeting notes quoted officials saying that “if the economy continued to make rapid progress it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases”. That’s Fed speak for, “we are thinking about it but don’t worry yet”. Remember, the Fed’s path is the following: prepare markets for reduced monthly bond purchases (now $120B a month), actually reduce bond purchases, then start raising rates. This release is significant as it’s the first hint. Markets didn’t fully throw a tantrum today. The 10 year jumped from 1.62% to 1.69% this afternoon, settling at 1.67%.
Focus on Retail
The pandemic upended the retail sector hard but the comeback is happening. (But, not for all properties). Trends already in place were greatly accelerated by the pandemic: ecommerce, grocery delivery, and mega stores such as Target/Walmart acting as fulfillment centers for customers picking up or returning merchandise. Last year at this time, we saw shopping center owners dealing with closed tenants, some paying partial rent or no rent and requesting rent deferrals and/or abatements.
The recent CBRE Q1 2021 US Retail report has some eye popping statistics. Total retail sales increased 14% year over year. Q1, March 2021 sales growth of 28% was the highest monthly year over year ever recorded by the US Census stat bureau. Consumer sentiment improved to its highest post-Covid level, total net absorption has been positive for 2 consecutive quarters. Demand is high for freestanding single tenant properties as drug stores, grocery stores and fast food have thrived during the pandemic. On the other hand, the road to obsolescence grows for many of America’s large shopping malls. TreppWire reported on a flurry of malls with CMBS loans being handed back to the lender/servicers. The Prizm Outlets Mall in Primm, NV has been liquidated at a great loss to the bondholders. Brookfield is cooperating in friendly foreclosures of the Florence Mall (Kentucky), Bayshore Mall (California) and the Pierre Bossier Mall in Louisiana. Interestingly, the Prizm and Florence properties were part of the infamous “CMBX 6” grouping of bonds. CMBS 6 is a traded index of CMBS bonds originated in 2012, which had a large percentage of malls that rushed to refi as the CMBS “2.0” era began after the Great Recession. Legendary investor Carl Icahn has netted billions of dollars in profits by shorting the CMBX 6, these losses add to his gains. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners