February 21, 2020
“How are deals getting done?” That was the question for an in-depth discussion from a debt and underwriting perspective at Connect Retail West 2020, and the panel had Cushman & Wakefield’s Eric Paulsen, Banc of California’s Jim Wiegandt and Money360’s Ken Gaitan agreeing on one thing: neighborhood retail and strip centers providing services and experiences you can’t get on Amazon or from the internet are strong performers in today’s retail sector.
Key takeaways defining the overall panel included:
– There is a strong appetite for net lease, single credit tenant retail investments where and when they are available. This is a passive versus active approach for investors in retail.
– There is more capital chasing deals then there are deals to fund in the net lease “safe haven” space, which is encouraging investors to look at secondary and territory market opportunities when deals are attached to a credit tenant.
– Defeating the split roll property tax on California’s November 2020 ballot is a priority as it could be devastating for commercial real estate owners across all asset classes, retail especially.
– 2019 retail investment sales transactions have slowed and saw a 28% drop from previous years.
– Malls and vacant big box are seeing the brunt of the “internet era” fallout hitting retail assets.
Banc of California’s Jim Wiegandt still considers retail a targeted allocation for the bank’s capital, and is funding deals up to a $35 million credit advance, making neighborhood and net lease retail his primary target. Historically he said his neighborhood retail and strip center loans have been one of his top performing asset types. While cap rates may be in the low 4s and 5s in premier markets, Banc of California still prefers the lower risks associated with these top market assets, although with the right management in place will lend throughout the US.
Money360’s Ken Gaitan is seeing a velocity of deals for repositioning, re-tenanting and converting struggling retail assets. He is seeing wide range of business plans reflecting the need to repurpose vacant big boxes and redevelop or renovate struggling assets, some of which don’t meet the necessary underwriting to warrant funding. Ultimately, as a transitional lender, his capital is best suited for property transactions and investments with a problem in place, be it vacancy, redevelopment or repositioning programs. However, a strong business plan is a must.
CushWake’s Eric Paulsen used the label “Yield Refugees” when describing the flight of capital from California to other national markets in pursuit of higher cap rates, and his team of investment sales specialists are placing tenant-driven investors in markets like Atlanta and Chicago where retail cap rates move from 4s and 5s to 6s and high 7s. He also pointed to a current CushWake assignment to find 20 expansion locations for Dick’s Sporting Goods as a sign traditional retailers remain active, a seemingly contrarian strategy to market trends but hopeful .
For comments, questions or concerns, please contact Chris Egger