As a company deeply rooted in financing retail properties, we are currently finding continued scrutiny towards the financing of retail properties 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:
Where has retail financing volume at Barry Slatt Mortgage historically ranked among the four major property types? Considering the current trends, do you see this changing over the next 6-12 months?
Retail continues to be a substantial portion of our overall production at Barry Slatt Mortgage Company. We represent several Life Insurance Companies, CMBS, and Bank/Credit Union lenders that are comfortable lending on retail. With these relationships, retail has consistently ranked near the top of our production. Although the recent focus of the lending community has been on core grocery-anchored retail and strong credit tenants, we continue to see demand from our lenders for well-located neighborhood unanchored strip retail and single-tenant credit net lease product.
Over the next 6-12 months, I do not expect to see any significant change in the availability of debt for retail. Although many lenders have increased their appetite for industrial, office, and multi-family opportunities, the bi-product of this diversification is that the lenders will continue to lend on retail as their overall portfolios diversify.
Are you seeing any lenders adjust their lending programs as it relates to retail properties? Is there still a negative bias?
Lenders continue to take a measured approach to financing retail properties. I do think the negative bias toward retail has waned over the last couple of years, but most lenders are still taking a cautious approach. Some lenders are moving back into the retail space because vacancies are low and fundamentals are strong. According to multiple research documents, national vacancy rates for retail over the past 4 quarters has remained under 5%. Developers and owners continue to reinvent retail space and are finding more ways to address junior and big-box vacancies with non-traditional retail users. Lenders are slowly starting to understand the shift from traditional retail to entertainment/destination retail and are in turn open to providing competitive debt solutions for these projects.
If I had to point out any material change in lender programs or underwriting, it would be that lenders have a higher frequency of requiring partial recourse (personal guarantees) or the use of TI/LC (tenant improvement / leasing commissions) reserves for big and junior box tenants that roll during the term of the loan or that may have a speculative credit rating or financial outlook. Some lenders who have traditionally been active in secondary or tertiary markets have shown more restraint in pursuing such transactions.
Have lenders changed their view of financing single-tenant and strip retail properties?
The availability of debt for single-tenant properties continues to be strong. As interest rates have fallen over the past 3 months, single-tenant and smaller strip retail properties (which fall into a similar category) continue to be a very attractive place for investors and lenders to place their capital. We are seeing a significant push for these assets by banks, credit unions, and small life company lenders. Many of the lenders playing in this space are looking for single-tenant credit (S&P rated BBB- credit or higher) or well-located multi-tenant strip-retail with a concentration of national tenancy.
Where are lenders pricing most retail loans today? Does LTV, size, and tenancy play a significant factor in how the debt is priced?
In short, all 3 variables matter, and pricing is extremely competitive.
In the larger loan space ($10MM and larger) both CMBS and Life Insurance Company lenders can price down into the high 2% and low 3% space. The lower range is for core market assets with leverage in the sub 55% LTV range. For leverage higher than 55%, interest rates are generally in the low/mid 3% to low 4% range depending on several variables. It should be noted that many lenders have floors around 3% – 3.5%.
In the smaller market space ($1MM – $10MM), rates continue to be competitive. However, interest rate floors or index floors are more prevalent in this space. We are seeing interest rates in the mid/high 3% to low 4% range across most platforms.