January Retail Capital Markets Update

Retail lending will be steady going into 2018, although borrowers could start to see lower leverage and higher DSC requirements. Look for a push toward neighborhood shopping and strip centers as these assets tend to have Amazon-resistant tenants. Lenders will focus on retail centers with a majority of tenants being service oriented vs traditional retail centers. Lenders are expecting a lot of rent reductions and store closures because of this shift. Retail will be harder to underwrite for the next 12 to 36 months because of bankruptcies and downsizing in the market. Keep an eye out for lenders to watch rents very closely over the next few quarters. Owners need to stay relevant in this changing market and innovate to keep foot traffic coming in.

 

Banks:

Leverage will be the main pain point for borrowers with leverage topping out around 65-70% LTV for senior debt. Rates will fall between 4% on 5-year resets and 5% on 10-year fixed rate options. Banks will be the most competitive for smaller “mom-and-pop” retail centers. Banks will consider non-recourse loans, but most will have some level of recourse.

 

CMBS:

All the major CMBS lenders will be active in the retail space. Leverage will be tapped out at 75% with lenders looking for debt yields will start at around 8% for the most desirable assets, but most deals will be done with debt yields in the 9-10% range. 10-year fixed rate money will be in the high 4’s to low 5’s.

 

Private Debt Funds:

The private debt funds will be active in the retail space throughout 2018 as other capital providers become more conservative. Expect leverage to reach 80%, with rates between 5-9%. Ground-up construction financing will be considered by a number of these private debt sources.

 

Life Insurance Companies:

 The life insurance companies will be active throughout 2018. Their focus will be on the strongest assets in markets with strong job and population growth. Markets tied to oil markets will be tougher for life companies to underwrite. Leverage will max out around 65%, but most deals will be done below 60% LTV.

 

Construction:

 Expect all lenders to be cautious when considering ground-up construction opportunities. Lenders will scrutinize the current development pipeline for new product coming on the market. Due to increased supply in most markets, lenders will underwrite longer stabilization timeframes. Banks will max-out at 60% LTC and borrowers will need to consider mezzanine or preferred equity to obtain maximum leverage. Private debt funds will fill the gap for new