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Experts See a More Selective Lending Environment for Retail Assets

The flow of liquidity will be tempered and reserved to the most desirable property sub-types and geographical markets.

Even before the early 2018 store closings and retail bankruptcies can be tallied up, the real estate industry it taking a look at the availability of financing capital for retail centers.

As could be expected, the flow of liquidity will be tempered and reserved to the most desirable property sub-types and geographical markets, with landlords likely to face a more challenging environment for raising capital in 2018. Traditional sources of financing, such as loans from commercial banks, will be more difficult to obtain, industry insiders say, for reasons ranging from property-level fundamentals to the full implementation of risk-retention rules for banks.

“It will be difficult for small developers and smaller un-anchored properties to obtain financing,” said Larry Jordan, senior vice president of capital markets with real estate services firm Transwestern. “Power centers will struggle due to continued contraction in store counts and footprints.”

In 2017 major retailers closed about 6,955 stores, according to the FGRT Store Openings and Closures Tracker. Since the start of 2018, retailers have announced about 1,446 closures. The retreat of traditional retailers has prompted some developers to re-tenant vacant spaces with tenants geared toward restaurant and experiential uses.

“Well-conceived mixed-use and grocer-anchored centers with good sponsorships will be able to obtain financing,” Jordan said.

While investors and lenders are likely to be more discerning about which retail property types they invest in, the sector has been giving investors some reasons for confidence. In a recent report on CMBS delinquencies, Morningstar found that delinquencies among retail loans packaged into CMBS deals reached $7.9 billion in November. That figure is less alarming, considering that delinquencies fell by $602.2 million, or 7.1 percent, in that month.

On a trailing 12-month basis, delinquency rates among retail loans in CMBS deals have been falling since August 2017, when 6.45 percent of retail loan balances were in arrears, according to Morningstar’s information. By November 2017, that percentage had dropped to 6.12 percent.

Industry professionals expect investors to remember the lessons of the last real estate cycle.

“Today’s investors remain risk-averse and are looking for development opportunities that are less speculative in nature,” says Stephen Polanski, a senior vice president at Buxton Co., a Fort Worth, Texas-based research company. “Urban mixed-use properties and even suburban mixed-use town centers are among the most desirable property types because they are viewed as a more sustainable form of development than the retail-only strip centers of the past.”

These property types reflect the retail industry’s new reality, Polanski says.

TAGS: Lending News
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