New PPI Concerns Put the Retail Market on Notice

Experts keep arguing about the possibility of a recession — some projecting confidence that a soft landing is possible. Others questioning whether factors like sliding consumer confidence, rapidly rising oil prices, an expanding UAW strike, and a looming government shutdown could kick the props out from under the economy, especially if consumers decide they can’t keep charging the

Now there’s another complication as Trepp recently noted: A big surge in the Producer Price Index sends an additional sign that retailers could be caught between challenges in supply as well as demand.

PPI for final demand took a seasonally adjusted 0.7% increase in August after a 0.4% bump in July. “The August advance is the largest increase in final demand prices since moving up 0.9 percent in June 2022,” the Bureau of Labor Statistics wrote. “On an unadjusted basis, the index for final demand rose 1.6 percent for the 12 months ended in August.” The unadjusted numbers allow a year-over-year comparison.

“This increase in wholesale prices was almost double the 0.4% increase predicted by WSJ economists and is a signal that inflation will persist for a while,” Trepp’s Vivek Denkanikotte wrote. “With high inflation and subsequently higher interest rates, one sector in commercial real estate is particularly impacted. The PPI data surpassing expectations implies an escalation in production expenses for manufacturers. This in turn increases the costs for sellers to acquire and sell goods, resulting in diminished revenues and net operating income (NOI).”

Lower NOI could mean that loans backed by retail properties could face performance challenges. Retailer tenants could find themselves squeezed on both sides. Not only might vendor prices rise, but those higher prices either get absorbed by the retailer or passed along, which increases inflation and discourages buying.

Also important to remember, the PPI increases were last month, meaning the financial pain is already in the retail system.

“These factors could have a negative impact on retail properties, especially those dependent on an in-person presence for sales, like malls,” Denkanikotte wrote.

Trepp then noted retail loans to watch for September 2023, including the $69.3 million Hagerstown Premium Outlets (Hagerstown, MD) that are 30 days delinquent; the $26.8 million Seacourt Pavilion (Toms River, NJ) for which the collateral value has been cut and now sits below the loan balance and loan modification is no longer on the table; the 85,289-square-foot Heritage Towne Centre (Birmingham, AL), which has a loan maturing in 2024 and sold recently for $5.2 million when a 2014 valuation was $6 million; and the $106.4 million Mall at Tuttle Crossing (Dublin, OH), just saw a top bid of $15 million.