LA Cities in Crisis: How Budget Cuts Put Retail Real Estate Risk Front and Center

This Signal Triggered Before the Last 4 Recessions. It Just Happened Again. The question of whether the U.S. economy is heading toward recession is a polarizing one. On one hand, GDP grew at a 4.4% annualized clip in the third quarter. The unemployment rate is still in the 4% to 5% range. Inflation is still well above the Federal Reserve's target but it's also sustainably below the 3% level...

By Marc Perlof | MarcRetailGuy February 16, 2026 If you own retail real estate, here’s what just changed for you. Retail Developers: Why Your Deal Dies After You “Win” the Site Winning the site is not the win. Making the numbers work is the win. Today, many retail deals fail after the land is secured. Not because the site is bad. Because the math breaks when the market changes. If you own retail property, you must understand: Retail development underwriting. Retail real estate return on cost. Retail development exit cap rates. Retail capital stack risk. Retail tenant lease-up risk. These are no longer just developer terms. They determine whether your investment survives. Let’s look at the math. Example: You build a retail project for $12 million. You expect $1,000,000 in annual net operating income. Your retail real estate return on cost is: $1,000,000 ÷ $12,000,000 = 8.33% That looks strong. Now look at your exit. If buyers price the deal at a 6.75% cap rate, the value is: $1,000,000 ÷ 0.0675 = $14.8 million. Now stress test it. What if: Construction costs rise 8% Tenant Allowance costs rise Leasing is delayed 6 months Retail development exit cap rates expand 0.75% New total cost: $12.96 million New exit cap: 7.50% New value: $13.33 million Your profit shrinks fast. That is how deals die. Now let’s talk about retail capital stack risk. Most retail developments today use: 60 to 65% senior bank debt 10 to 15% mezzanine or preferred equity 20 to 30% sponsor equity If lease-up slows, lenders may: Increase reserves Delay refinancing Restrict distributions Tighten loan covenants Even a good property can become a weak investment. Retail tenant lease-up risk is another hidden problem. If your anchor tenant opens late: Interest continues Carry costs increase CAM recovery slows Cash flow weakens A short delay can materially impact your return. What does the market show? Retail vacancy remained near 5% in 2025, even as leasing velocity slowed.¹ Net lease cap rates averaged around the high 6% range in late 2025, with investors focused more on tenant quality and lease term than rate movements alone.² Assets with strong credit tenants and longer lease terms continue to command better pricing.² These trends mean one thing. Your retail real estate return on cost must exceed your retail development exit cap rate by a meaningful spread. A thin margin no longer protects you. If you earn 8.25% and expect to exit at 6.75%, that 1.5% gap may not be enough once capital stack risk and lease-up risk are fully modeled. Today’s retail development underwriting must include: Cap rate expansion Lease-up delays Construction overruns Higher cost of capital If your deal cannot survive realistic stress testing, it is not an investment. It is a momentum trade. If you own retail real estate or are planning a development, do not rely on optimistic pro formas. I stress test return on cost, exit assumptions, tenant structure, and capital stack exposure before capital is committed. Call or DM me for more information. What happens to your current property value if exit cap rates expand and your next tenant takes longer to open than expected? #RetailDevelopmentUnderwriting #RetailRealEstateReturnOnCost #RetailDevelopmentExitCapRates #RetailCapitalStackRisk #RetailTenantLeaseUpRisk