Retail Is Winning. I’d Reopen Office.

By Daniel Erb | Founder & CEO, EM Capital | Research & Underwriting for RIAs & Allocators | Author of The Allocation Memo | October 22, 2026

Kimco bought two grocery-anchored centers for $109 million at a reported 5.7% cap rate. Cousins paid $317.5 million for Charlotte’s 300 South Tryon and projected a 7.3% first-year cash yield. Those are different income measures, not a measured office premium. But they put a price on the allocation question: how much should we pay to own the sector already winning?

I’d reopen office. Put managers buying existing, competitive, multi-tenant buildings back on the shortlist, starting in Charlotte. The opportunity is to buy leases that can turn a local shortage into higher cash income. A purchase preference must then survive the capital bill, financing and a credible retail alternative.

Retail’s strength is reaching purchase prices. CBRE’s August 12 cap-rate survey found neighborhood retail had the largest average cap-rate compression in the first half. That is a survey estimate, not a matched transaction index. It nevertheless gives the comparison urgency: stronger demand for an investment can leave the next buyer earning less on its starting income.

Retail deserves much of that confidence. Regency’s July 29 results showed Q2 same-property NOI growth of 2.9% excluding redevelopments, versus 3.8% including them. Comparable new and renewal leases carried a 10.4% cash rent spread. That spread is not annual portfolio growth, but it is evidence of tenants accepting higher rents.

The shortcut I reject is allowing that better operating record to settle the next purchase before considering price. The office case deserves a hearing precisely because retail has become easier to like.

The lease has to capture the shortage

CBRE’s October 9 Charlotte report supplies the demand missing from a simple “nothing is being built” argument. The market absorbed 456,000 square feet in Q3, its fourth consecutive positive quarter. Prime vacancy fell about 6.5 percentage points over a year to 7.7%, against 22.0% market-wide.

The report does not list the buildings in its prime cohort. For an acquisition, the useful definition is the space a particular tenant can actually choose: location, usable floorplates, building quality and amenities, at an acceptable total occupancy cost. A Class A label cannot establish that competitive set. Signed rents after concessions are better evidence than asking rents.

Charlotte had 725,000 square feet under construction, 78.1% preleased, scheduled for Q4 2028. CBRE locates that construction in Midtown and SouthPark, with none in Uptown. This supports investigating existing Uptown buildings whose tenants need that location. It does not make all Uptown space scarce or establish that scarcity expires in 2028.

The manager needs to map what those deliveries change. Some tenants may leave existing buildings behind; others may expand or bring new demand. The preleased area is not a forecast of equivalent future vacancy. Renovated buildings and space released by downsizing may also compete with the acquisition.

The lease calendar decides who captures the opportunity. I want identifiable renewals or new leases that can benefit from today’s limited alternatives, with enough tenant diversification and funded capital to withstand departures. Later lease events must work against the competition expected then. A seller cannot charge for five years of scarcity merely because the next two look promising.

There is evidence that office rent gains can reach operating cash. Cousins’ July 30 results reported 9.2% higher cash rents on second-generation leases and 5.9% growth in same property cash NOI. The lease spread compares the old rent with the new rent after its free rent period; it does not describe an immediate cash increase. These portfolio results support the mechanism without proving it for a Charlotte purchase.

Capital still takes a substantial share. Cousins’ leasing table reduces $41.35 per square foot of annualized straight-line net rent to $28.05 after free rent, commissions and improvements. Those costs are spread over the lease term. This is not an annual cash-reserve percentage, and cash NOI growth itself is before those capital outlays.

The price can reverse the answer

Cousins’ February 10 notes prospectus describes 300 South Tryon as fully leased, with about six years of weighted average lease term remaining. Its projected 7.3% cash yield uses contractual rents for the first 12 months after closing. The separate 8.8% GAAP yield is not spendable cash.

An average lease term does not reveal which leases reset before 2028, their options or their capital needs. Nor does CBRE identify this building as part of its prime cohort. It is a documented office price, not a demonstrated scarcity bargain.

The retail anchors need equal care. Kimco’s August 4 release reports 5.7% across two July purchases funded with 1031 exchange proceeds. One came through its structured investment program, including repayment of a $35 million mezzanine investment. The release does not reconcile that cap rate to Cousins’ forward cash measure.

Phillips Edison’s July 23 supplemental reports $277.9 million of first-half acquisitions at a weighted 6.7%, defined using estimated in-place NOI and contract price. The basket includes land, joint-venture interests and centers with different leased rates. These disclosures give us prices to test, not a matched pair with known capital budgets.

Here is one illustrative comparison. Give each hypothetical purchase $1 million of annual cash NOI after operating expenses. Use the disclosed yields as scenario anchors on that common cash basis. Reserve 25% of office NOI and 12.8% of retail NOI for future building and leasing needs. These are assumptions, not verified budgets for the named assets.

The reserves are uncertain. Test office at 20%–30% and retail at 12.8%–19%, and office’s advantage over the 5.7% retail case ranges from 0.14 to 1.22 percentage points. Against the 6.7% case, it ranges from a 0.73-point deficit to a 0.41-point advantage. Those are scenario bounds, not confidence intervals for actual properties.

The table charges for future leasing but credits no rent increases. At the base assumptions, office needs about $50,000 more annual cash after reserves merely to match the 6.7% retail case at unchanged prices. Alternatively, it needs an entry yield of about 7.8%. Neither calculation allows for retail growth or the extra return office risk should require.

That is the bar. A rent roll can tell us whether a building has a credible path over it. A sector label cannot. If the seller already capitalizes the higher future rent while the buyer still has to fund its delivery, scarcity has primarily benefited the seller.

Put the right mandate back in contention

The strongest retail countercase is that desirable office alreadyp.costs too much relative to the cash it retains. Grocery-anchored centers have real rent growth, their own supply constraints and potentially less costly renewals. Our illustration’s retail reserve does not fund redevelopment, which is why Regency’s 2.9% result is the cleaner operating reference. Even that portfolio result is not a forecast for either retail acquisition basket.

A retail purchase that starts with more retained income and keeps growing it can beat office without any heroic assumption. One poorly budgeted office departure can erase the advantage over the more expensive retail case. EM’s Q3 sector model supplies no rescue: office and necessity retail were effectively tied relative to their respective risk hurdles. That near-tie establishes no mispricing.

I’d give an office manager a place on the shortlist for showing how a specific building turns limited tenant alternatives into cash at an acceptable purchase price. Start with Charlotte’s existing competitive buildings, a dated lease schedule and a fully funded leasing plan. Challenge any acquisition case that combines a high sector-average entry yield with prime- building rents and retention. The manager must show that combination in a real purchase.

Financing can consume a thin advantage. With 50% debt on each hypothetical purchase, about one percentage point of extra office borrowing cost erases its advantage over the 5.7% retail case. Carry the lease events, capital payments, debt maturities and fees into the limited partner’s dated cash flows. Advance from a shortlist to a preference only when those returns compensate for the office risk and compare favorably with an available retail alternative, without requiring a richer resale valuation.

Pass if the rents arrive after the planned sale, the leasing budget cannot withstand plausible departures, or the price requires the buyer to deliver improvements the seller has already been paid for. A strong retail alternative is also a perfectly good reason to pass. Over the next two quarterly reports, watch Charlotte’s prime vacancy alongside the actual competing space and managers’ signed rents after concessions. Rising availability combined with weaker renewal economics would weaken this case. Leasing costs repeatedly consuming the rent gains would overturn it. One soft citywide quarter or one new building would not settle a specific acquisition.

Retail has earned its stronger operating reputation. It has not earned a blank check. I want office managers back in competition for capital when they can buy a lease opportunity the price has not already captured. Waiting for the whole office sector to look healthy could mean waiting until that opportunity is in the seller’s price.

EM sector analysis: Q3 2026 report; illustrative calculations: October 20, 2026. This edition is educational.

The comparison is illustrative and uses hypothetical purchases normalized to the same income. Nothing here is investment advice, a recommendation, a valuation of any property or fund, or an offer of any security.