Chicken Little or Chicken Sandwich
Has Financing For Shopping Centers & Commercial Retail Evaporated?
By Scott Lynn
The rise of Amazon, online shopping and major retail store closings have debt & equity providers spooked. The Mortgage Bankers Association (MBA) compared loan origination volume for property types during the 4th Quarter of 2018 over the same period of 2017… multi family was up 32%, Industrial was up 28% but retail property originations increased by barely 1%.
No question, financing retail properties today has become increasingly difficult BUT, not impossible. Transactions are requiring much more thoughtful underwriting, structure and, PERSISTENCE. Our firm is in the trenches…during 2018 we arranged debt & equity capital specifically for retail property transaction totaling in excess of $250,000,000. Retail financing was almost 30% of our 2018 production book. 1st Quarter 2019 Production exceeded another $60mm of retail financing.
What’s getting done, by whom and how is better explained by highlighting some of our recently closed transactions.
Last year, our firm arranged a joint venture between a US-based operating partner and a publicly traded foreign REIT to acquire grocery-anchored, dominant shopping centers in secondary markets throughout the Southeast and Midwest. The investment thesis centered around taking advantage of the “Amazon effect” is having on retail property valuations as cap rates began to widen resulting in attractive pricing/returns. The REIT has committed to deploying several hundred million on the strategy but it was key this equity had to be properly leveraged at a time when retail capital providers are trying to deleverage.
Since late 2017, the joint venture has acquired eight properties totaling over 2.3mm SF. MCA’s assignment included placing independent long-term fixed-rate mortgages on each property that featured an aggressive “interest only” payment structure. In addition, MCA secured Preferred Equity investors in a select scenario. Best-in-market real estate, Amazon-resistant tenant rosters selling “basics” catering to “treasure finders”, high occupancy and tenant sales histories made the proposed assets and capitalization structure attractive to numerous capital providers.
On the construction and development front, Metropolitan Capital recently completed equity and debt placement for three major retail development project in the North Texas market. MCA arranged a joint venture equity partner to invest in the development, The Shops at Chisholm located in southwest Fort Worth anchored by Marshalls, Old Navy, Ulta Beauty and Five Below. The project is heavily pre-leased and there was a favorable construction loan in place allowing the equity partner to step into a development with an immediate start.
MCA arranged a $34,000,000 construction loan for Epic Town Crossing. The project was 63% pre-leased to Ross, Michaels, Conns, Burlington, Petco, Ulta and Dollar Tree in addition to a host of pad users. Ikea co-anchored, heavily pre-leased and best in class sponsorship allowed MCA to secure an interim construction loan at favorable leverage.
Finally, MCA arranged an $11,570,00 land development and construction loan to start construction on the Southgate in southwest Ft. Worth. Phase I of the project will be focused on restaurant users that will include Starbucks, Chipotle, Panera and Cheddars. The project will eventually include larger retailers, grocery, residential and a gym. The current landowner formed a joint venture with a “best in class” developer who secured the pad site and lease commitments from the pad users/buyers to allow the first phase of the project to commence.
So, the theme here is evident, the sky is not falling in the retail property financing world. Quite the opposite if you are an experienced sponsor/developer with deep-rooted and evolving tenant relationships. Mitigating risk, demonstrating a consistent property cash flow along with an ability of the property to carry or repay the capital stack is tantamount to getting a retail deal financed in today’s world. We believe acquiring and developing retail properties will continue to be challenging but there is significant opportunity to generate higher return while mitigating risk.
The author, Scott Lynn, is the Founding Principal of Metropolitan Capital Advisors based in Dallas, TX. To further discuss your retail financing requirements, contact Scott Lynn [email protected] or 972.764.8801.