As a company rooted deeply in financing retail properties, we are currently finding an overwhelming amount of scrutiny over retail in the marketplace. Daniel Friedeberg, CEO at Barry Slatt Mortgage, recently discussed this topic with Michael Kaplan, President at Barry Slatt Mortgage. The following are excerpts from that discussion:
Friedeberg: Where historically has retail financing volume at Barry Slatt Mortgage ranked among the four major property types? Considering the current retail conditions, do you see this changing over the next 6-12 months?
Kaplan: We represent some of the more retail focused Life Insurance Company lenders in the market as well as several CMBS and Bank/Credit Union lenders in that space. Because of these relationships, retail has always been a substantial portion of our overall production at Barry Slatt Mortgage Company. Although the recent focus of the lending community has been on core grocery anchored retail and stronger credit tenants, we continue to see demand from our lenders for well located neighborhood unanchored strip retail and single tenant net lease product. Even though there has been some heightened scrutiny placed on large big box single tenant properties and large indoor malls, there are still competitive financing solutions for these assets. Over the next 6-12 months, I do not expect to see any significant change in availability of debt for retail, but I would say that retail lenders may give some ground to more industrial, office and multi-family opportunities.
Friedeberg: Are you seeing any lenders adjust their lending programs as it relates to retail properties?
Kaplan: In general, lenders are in a more observant position today regarding retail than they were in previous years. Some are taking a cautious approach with certain tenants as well as property types. This can be expected due to recent bankruptcies and store closings among traditional brick and mortar retailers. With that stated, there has not been a large deviation from normal underwriting practices, and lenders are still putting money to work in the retail sector. If I had to point out a material change, it would be that I am seeing lenders have a higher frequency of requiring recourse or the use of TI/LC reserves for anchor tenants that roll during the term of the loan. In addition, some lenders who have traditionally been active in secondary or tertiary markets have shown more restraint in pursuing such transactions. There are lenders who have not changed, and overall, the landscape of most retail product is not significantly different than it was 12 months ago.
Friedeberg: How are lenders looking at big box retailers as well as other single tenant uses?
Kaplan: It’s a very common question today, but not an easy one to answer. In short there are lenders who have decided that it is not in their best interest to provide loans for large big box single tenant retail or centers that have high concentration of large big box stores. On the other hand, there are lenders who have historically not had the opportunity to lend on power centers or neighborhood centers that are now making a push to provide a solution for these owners.
What has recently changed is that borrowers must make some calculated decisions to secure a loan on these products? The decisions may include making certain programmatic concessions so that a borrower can secure debt for these perceived “flawed” assets. Such concessions are providing certain levels of recourse, taking a shorter amortization or in some cases just paying a higher interest rate. In some instances, recourse lenders that have very competitive programs with high certainty of execution are filling the gap where the “risk” tolerance does not fit the typical non-recourse lender. We have found that after going through the process with these relationship lenders, many borrowers end up determining that certainty of execution offsets these additional concessions.