May 30, 2017
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By Dennis Kaiser
The retail sector continues to experience significant shifts as it adapts to pressures including overbuilding, consolidation and e-commerce. Connect Media asked George Smith Partners’ Gary Mozer and Gary Tenzer to share insights into the trends driving retail, and how they are impacting financing today. Here’s what they had to say about how to secure capital for retail properties.
Q: With a wave of store closings sweeping across the U.S., how are retail owners securing competitive financing for their properties?
Mozer: Borrowers need to assist lenders in understanding the viability of the center. For development, preleasing is the best way to show demand. If there is not enough time to prelease, then secure letters of intent. To obtain competitive financing on bridge debt, once again one must show market demand. For permanent financing, the best way is to show the health ratios (occupancy cost/store sales) and tenant credit to the lender. In each case, demonstrating supply and demand is of utmost importance. If a tenant leaves your center, the ability to show that it can be replaced is critical. Note, lenders are all carefully looking at the credit of each tenant in a shopping center, and try to create reserves and structure in case they go dark.
Q: What shifts are taking place in the retail market, and what does lender appetite look like for retail assets?
Tenzer: We all know there is tremendous pressure from e-commerce on brick-and-mortar retail. Home delivery, for example, is projected to grow 10 percent over the next 10 years. As delivery services such as Amazon Fresh emerge, traditional grocers and retailers will need to evolve in order to stay competitive in the current retail landscape.
Based on the degree of change and uncertainty in the retail sector, lenders are being much more conservative in their underwriting for retail assets. That said, there is plenty of capital available for well-located retail centers with a strong tenant mix and high sales per square foot.
For centers with struggling sales or less credit-worthy tenants, there are still opportunities for capital – borrowers will need to work closely with a financing intermediary, such as George Smith Partners, to make sure that they present their property in the best possible light to an array of lenders.
Q: What is your outlook on the retail sector for the remainder of 2017 and beyond?
Mozer: Retail is a broad category. Non-fortress malls are difficult to finance without recourse or lots of equity with the risk of anchor closure. Value centers with discounters and grocery anchors are still in favor. Strip retail can be challenging because of the lack of credit. High street is still in favor for urban infill locations with high walkability scores. In each case, there is financing available – it is all about the cost of that capital and leverage.
Tenzer: While lenders are still willing to finance retail assets, many will proceed with caution and will closely evaluate, location, tenant mix and lease roll over in their underwriting.
For comments, questions or concerns, please contact Dennis Kaiser