Recently, the headlines have been littered with descriptions of the decline of the traditional retail center: store closings, retailer bankruptcies and the darlings of online retailing delivering packages with drones.
It’s easy to read the headlines and get caught up in the whirlwind. At this point in the cycle, market participants have all acknowledged well-documented challenges and there is no arguing that retail is in an evolutionary period. Lenders are examining their portfolios as regulatory bodies and executive management focus on the potential impact of this evolution.
So, as a borrower, can you find bank capital to finance your retail property? The short answer — capital is available, but the transaction might look different than it did a year ago.
Defining the different types of retail properties is a good place to start, and Green Street Advisors, an industry leader in real estate research, provides the following retail property type descriptions (excluding malls).
Banks are willing to lend on most of the above property types for a stabilized asset, assuming a strong operating performance (solid tenant sales, high occupancy and consistent cash flows) in a strong market and an appropriate structure. For development loans, lender preferences on property type may not match the current industry trend of owners.
While street retail and lifestyle centers may currently garner the lowest cap rates, those can be more challenging property types for lenders to underwrite. These properties are usually in urban settings, shadow anchored by a unique offering or highly dependent on tourism. It may be difficult for a lender to understand those market dynamics, which may impact pricing and structure.
Conversely, centers that are grocery-anchored typically have the grocer leased for an initial term of 15 or more years with additional extension options. Ideally, the grocer produces a majority of the property’s revenue and provides consistent traffic into the center. With good demographics in the surrounding area, these properties more easily fit into most lenders’ structural parameters.
Regional Malls
While not specifically addressed above, regional malls are not immune to the loan market’s current scrutiny of all things retail. In fact, these assets can present even greater financing challenges today if they are lower in productivity/sales, are new developments (especially with lower initial leasing) or are very large.
Generally speaking, an asset could be located on “Main and Main” in a dense, high income market, but given the additional scrutiny, lenders may require a tighter structure than what was achievable 12 months ago.
- Lenders are requiring more upfront equity and placing a greater level of dependence and reliance on the sponsor/guarantor. Thus higher levels of guarantor covenants (i.e., minimum liquidity, a limit on contingent liabilities, minimum net worth, etc.) may be required.
- Extra analysis is being completed on tenants, sales figures and lease reviews inclusive of co-tenancy and kickout clauses or any other hurdle that allows the tenant to pay less than the contracted rent. Ongoing debt service covenant tests or cash sweep tests may be required to cover perceived risks.
- For development transactions, lenders will require a higher level of preleasing (60% or more) and require all the anchors to be signed prior to closing.
Ultimately, each deal is unique and there are multiple factors that will influence lender demand on any specific opportunity. Navigating the loan process should start with a conversation with your PNC Real Estate relationship manager. He or she can help you with preliminary questions and, when you’re ready, will connect you with Loan Syndications specialists who will look more deeply into your needs.
PNC Capital Markets LLC is consistently ranked in the top five real estate loan syndication businesses in the United States[1] and PNC Bank, National Association manages, as Administrative Agent, more than 440 syndicated lending relationships totaling approximately $70 billion in commitments.[2] We look forward to the opportunity to work with you.
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