CREJ

Page 6 — Retail Properties Quarterly — February 2019 www.crej.com Market Update R etail lending in 2019 is anticipated to increase compared to last year as lenders and equity inves- tors continue to get more comfortable with how the evolu- tion of omnichannel retail sales impacts bricks-and-mortar real estate. Lenders have been cautious since the overreaction to Amazon acquiring Whole Foods in mid-2017 and the herd focused on financ- ing other property types as many were already overallocated in retail. Retail investors had concerns about internet sales continuing to take sales away from retail stores, but retailers continued to expand into omnichannel sales, which absorbed space and created new uses. Value- add investors have proven to lend- ers that big-box retail in the right location can be repurposed into uses as diverse as creative offices, climbing gyms, car dealerships and discount health clubs. Following is a general summary of preferred property types, from best to worst, and what to expect with financing terms. 1. Grocery-anchored shopping centers in Class A locations with a top-two grocer. 2. Class A malls and Class A power centers with quality credit tenants. 3. Well-located neighborhood retail centers in strong demo- graphic areas occupied by internet- resistant tenants that serve the neighborhood. 4. New retail developments with a heavy concentration of restau- rants in Class A locations or con- cepts, like covered markets where 20 kiosk quick-serve restaurants offer healthier food options (compared to fast food). 5. Ethnic gro- cery-anchored centers. 6. Class B power centers. 7. Class B malls. At 65 percent loan to value or less, insurance companies will provide the lowest fixed and float- ing rates for the top four property types, followed by banks for short- er-term loans less than five years. The threshold for nonrecourse with a bank is approximately 60 percent on stabilized properties with qual- ity tenants. Commercial mortgage- backed securities lenders offer the combination of highest proceeds and interest only up to 65 percent for full term interest only and 75 percent LTV with no interest only. Debt funds are financing Class B power centers and malls but the investor must have a viable rede- velopment plan versus a cash flow play at a high cap rate. These prop- erties typically have failing or poor- ly performing anchors like Sears, Macy’s or J.C. Penny. The major ten- ants may own their building or the remaining lease term is too long for redevelopment potential. Class B big-box power centers usually have at least one tenant struggling with more than 20 percent of the total rentable area. CMBS lenders, debt funds and banks are the best lending sources for these types of properties. Twenty years ago, retail properties with a health club or a high con- centration of restaurants were some of the most challenging to finance. Internet-resistant tenants like this are now attributes. Some strong health clubs with high member- ship rates draw more shoppers on a weekly basis compared to a top- three market share grocery anchor. The omnichannel retailers have proven there will likely always be a need for bricks-and-mortar retail. The lack of new retail construction in this cycle also has kept vacancy rates down. The combination of evolving omnichannel marketing, new concepts and the lack of new retail construction nationwide are anticipated to continue and create more financing demand for retail properties throughout the year. ▲ Lending expectations for preferred property types Peter Keepper Principal, Essex Financial Group Essex Financial Group • The Market @ Spring Creek Shopping Center • Granby Business Center • Snow Bowl Steamboat • La Sagesse Boutique Hotel & Restaurant over 30 years in business and always evolving…. We are opportunity buyers and sellers. Contact us with your next great venture. www.westerncenters.com 303-306-1000 LEASED ACQUIRED SOLD • Meadows Shopping Center • Firestone Shopping Center • Over 100,000 square feet to successful tenants! Check out what we accomplished in 2018