May 14, 2019
By Dennis Kaiser
Alliant Credit Union’s Charles Krawitz, Vice President and Head of Commercial Lending, shares insights about the retail lending market, hot retail markets and product types, as well as advice for retail borrowers. As we prepare for the retail sector’s biggest event of the year, check out his thoughts about those topics and more in our latest CRE Q&A.
Q: Given all the turmoil across the retail sector, has store closings, bankruptcies and e-commerce turned out the lights on the industry from a financing perspective? Where are the opportunities you see?
A: While the headlines can be scary, and we have been cautious, we are not a fair-weather lender. Rather, we have stayed abreast of industry trends and sought to find smart opportunities. Fortunately, we have been successful at utilizing market intelligence to identify financing opportunities that fit with our risk appetite. Typically, this means finding properties that are supported by clear micro and macro demand drivers, owned by experienced operators with deep pockets, and have a demonstrable track record of stable performance. Above all else, it is important that a property can show consistent leasing activity in both good and bad times.
Q: What does it take to get a retail financing deal done today?
A: While the retail environment has been changing rapidly, the reality is that nearly 90% of sales are occurring in brick-and-mortar stores. The fallout in the sector, while largely attributed to the rise of e-tailing, is heightened by the fact that the United States has long been over-retailed. Estimates vary, but it is safe to say that the U.S. has historically had well over double the amount of retail space per person, in comparison to that of many highly developed European countries. Call it over-developed or under-demolished, there will clearly be continued tumult as the broader market seeks equilibrium. As such, getting a retail deal financed can be tough no matter the circumstances, but a proven location and stable tenants are central to doing deals today.
Retail assets are generally more appealing in in-fill urban locations or strong demographic centers with diverse tenants, including those in food service, discount merchandising and personal care. In addition, as we move toward “experiential retail,” innovative and different uses will also be required. Accordingly, property owners need to not only have a proven track record of success, but also need to have sufficient liquidity to provide for necessary TI/LC expenses, and the wherewithal to access a variety of tenants.
Q: Are there some favored segments within the retail landscape that you like and why?
A: Neighborhood shopping centers that have stood the test of time are preferred. When analyzing a financing opportunity, we look at the factors that have driven historical performance and ask ourselves if these same forces are still in place while considering what the future may hold. If a property has withstood the test of time, it is likely because rents have been moderate, ownership has maintained the property and the configuration permits the storefronts to be readily visible from the road. Furthermore, bay depths that are limited prevent retailers from having to carry large and expensive inventories. This typically encourages new product showcasing, and drives traffic to the center as consumers seek out the newest fashion trends and “hot” products.
Q: What markets are hot and which are not?
A: Urban in-fill markets, including walkable retail, are generally good markets because the demographics typically support strong retail establishments. The big issue to watch out for with these markets is ensuring the borrower’s rents are well within market and not pushing too far to the extreme. For instance, there are swathes of SoHo and Fifth Avenue in New York that are vacant because landlords are pushing for unrealistic rents. In general, we look to make sure properties serve needs that cannot be met effectively through the internet, and that the mix of stores promotes complementary cross-traffic between stores. While seeing that a property has been able to attract new tenants over time is highly important, having too much churn does not allow for a property to achieve an enduring identity and gravitas with consumers.
Q: What are some strategies you’d suggest those seeking financing apply? What’s your advice for borrowers?
A: Ensure leases are appropriately staggered, and that you have real data to back up your business plan. Avoid the lure of low prices and thinking you have what it takes to reposition the property and that somehow there will be a big upside for you around the corner. Retail is a very tricky business and there is likely a reason why a property is sitting largely vacant. Cutting the rent by 50% or more may very well not resuscitate many properties.
*Pictured Noble West Shoppes in Noblesville, IN. Alliant Credit Union provided a $14.1 million cash-out refinance of the 59,175-square-foot center.
For comments, questions or concerns, please contact Dennis Kaiser