Expect banks, life companies and conduits to be active in retail for the remainder of the year. Don’t be surprised to see many lenders chasing the same deal. Retail will be slightly more in favor than office, although it will most likely fall behind industrial and apartments on lenders’ lists. Expect banking arms at Union Bank and JP Morgan Chase to quote on retail deals on a recourse basis. Most of the major life companies have an appetite for retail loans and Allstate, PPM, MetLife, John Hancock, Teachers, Prudential, Thrivent Financial for Lutherans, New York Life, Nationwide, Symetra, Genworth, Protective Life, RiverSource and ING should all ink some retail before the year is through.
Despite the recent turbulence, CMBS will be a player but it remains to be seen how originations will be effected. All the conduits will look toward retail once pipelines open back up again. Anticipate Wells Fargo, BofA, Citigroup Global Markets and JP Morgan Chase to be active in retail through CMBS programs.
As CMBS takes a step back, it will allow the better life companies and banks to fill the void. LCs and banks will play in the 60% to 65% LTV field for retail assets. DSC will be 1.35x to 1.50x for an anchored property. LCs will be active but pricing could be a bit higher than everyone else. And although life companies can be selective, borrowers can enjoy a locked-in rate whereas rates with the conduits will not be determined until the day of closing.
Due to the turmoil in CMBS in the last couple weeks, it is difficult to predict where things will shake out. CMBS will remain a player; it is just a question of when it will stabilize. Look for the conduits to possibly open pipelines back up in the next few months. Once that happens, CMBS will quote 70% LTVs and 10% debt yield, depending on the market. Better markets will see 9% or sub-9% debt yield. All lenders will look for borrowers with significant net worth and liquidity who can stand behind the property and pay for TIs.
Lenders will look at “must have” retail going forward. Grocery-anchored centers will be the most attractive to institutional lenders, especially in markets with strong demographics. Power centers could also get some attention before the year is through. The key criteria will be solid long-term leases with good credit tenants and attractive sponsorship. Even more than some of the other real estate types, the amount of demand will be heavily market driven. Some markets will see an increase in rents and occupancy before year’s end, which will spur investment activity and the need for loans. Urban infill properties will most likely get the most attention, especially with a favorable tenant mix.
Unanchored retail will be tough for the next few quarters but once the market fully recovers lenders will start to look at this product type as well. Lenders might be more willing to work on this product if there is an established track record with the borrower. Class B and C properties will be more difficult and if the lease of a major tenant is set to expire the asset could be dead in the water. Secondary markets or secondary locations in primary markets might find lending to be a challenge. If there is any “hair” on the deal such as low sales per square foot or high vacancy, the number of interested lenders falls off.
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