With all of the market volatility that we are currently experiencing, we thought that it would be important to give a current retail market update. Daniel Friedeberg, CEO at Slatt Capital recently discussed this topic with Michael Kaplan, President of Slatt Capital. We also asked Putnam Daly, Partner with Preserve West Capital, to weigh-in on these timely questions.
- What short-term effects is the Coronavirus having on retail?
Uncertainty and capital market volatility are the biggest short-term impacts of COVID-19 in the commercial real estate finance space. With many goods coming from China, and Chinese factories working at a fraction of historical capacity, sales growth could be impacted here in the United States. Major retailers such as Amazon, Walmart, and Home Depot have all warned that the outbreak could have a negative impact on earnings with the major short-term impact being that consumer uncertainty will delay bigger ticket purchases.
Putnam Daily remarked that “Brick and mortar retailers will undoubtedly take a beating this next quarter as more and more consumers stay away from public spaces due to calls for effective public health policy. Those with an online presence and delivery service may offset some of the lost in-store revenue as consumers hunker down for worst-case scenarios but most of the product sold will be low margin commodity items. Restaurants and experience-oriented retailers will likely suffer also as people opt to stay in rather than go out over the next several weeks and months until there is more data on the spread/effects of the virus. Consumer spending was still increasing with lower interest rates through most of 2019 and the reaction to Covid-19 will likely stunt that growth; it is too early to know how significant an effect this will have on retailers but the effect could be immediate and then subside as consumers regain confidence”.
Regarding investment in retail product, Putnam continued, “On the investment side, there has been an immediate shift to quality assets. Much like in the equities markets, investors will flock to strong balance sheet companies or bondable assets that can ride through a short-term decrease in revenue. Medical and retail/service uses with an online presence will see more demand than experience and soft goods retailers in our opinion.”
- What long-term effects do you anticipate the Coronavirus having on retail?
The long-term impact of COVID-19 could be less significant for the major retailers as most feel optimistic and committed to their long-term approach. It is the small business retailer that could see a significant short-term impact and be unable to weather the storm long-term.
Mr. Daily commented on the long-term impact as well stating, “Ultimately, the long-term effects on the market will be determined by the short-term ones. Retailers are already struggling with e-commerce competition and rents being thrust upward in many markets due to pressure from higher construction and land costs (as other uses compete for high traffic locations). Those tenants already struggling will have a hard time sustaining with a quarter or more of declining revenue; I think it will produce a burden on lower capitalized companies to compete long-term and will likely push retailers that are already struggling out of business more quickly. This will create even further clarity on who the winners are in different retail segments and consolidate the fight between users like Target and Walmart with Amazon.”
“On the investment side, a continued flight to quality with lower interest rates could push values up on those assets with strong credit tenancy. Lesser credit companies will be approached with caution and we could see the disparity in yields/capitalization rates between them and quality/stronger credit tenanted projects at their widest since 2010.”
- What is the general appetite for retail loans out in the market?
Retail financing continues to be available and competitive. Although many lenders prefer multi-family and industrial properties, retail is still in the top 4 product types for all major lenders. Interest rates are at an all-time low for most retail, and borrowers who have low leverage multi-tenant centers with strong anchor tenants are seeing very competitive options for long-term fixed rates in the low to mid 3% range. For more of the middle market class B retail and most single-tenant net lease product, lenders are still very active, but interest rates are generally 3.50 – 4.00% (25-50 basis points higher than the low LTV or best in class product).