Shopping center owners are having no trouble financing their properties, despite some of the negative commentary swirling around the retail industry, RECon panelists said Monday. “It’s a great time to be a borrower,” noted Michael Phillips, a managing principal at Lubert-Adler Partners.
Retailer closures are not the only story, Phillips pointed out. “You still have 10 or 15 retailers out there that are dominating right now and opening new stores,” he said. Describing his own investment criteria, Phillips said he tries to determine if a center is going to be a winner in a particular market. “We are doing plenty of retail deals, but you just have to pick and choose the best ones,” he said. “We’ve been putting more money into retail because we see more opportunities there.”
Lender underwriting standards have held firm, which is important for avoiding any repeat of the manic capital markets that characterized the previous financing cycle, some said. Generally, lenders continue to focus on the fundamentals, according to Patrick Nutt, managing partner of Calkain Cos. “It seems like there is unlimited capital looking for assets in core markets,” he said.
Centers in secondary and tertiary markets are also gaining popularity, said Larry Brown, president of Starwood Capital Mortgage. “The value is often in those markets,” he said, “and we would rather do a deal on Main and Main than in a fancy ZIP code, if everything looks right.”
Grocery-anchored centers are proving to be the most popular retail property type with lenders. Brown noted that his firm is doing deals with loan-to-values as high as 70 percent. “As long as they are generating 25 to 30 percent of the center’s income stream, there is plenty of liquidity out there.”
Lenders continue to look for owners who are capable of weathering a downturn and have good relationships with their tenants. “That relationship is really becoming key,” said Phillips.
Rising interest rates are causing some owners to worry, and Brown said he has received more requests for rate locks in the past two months than in the past 26 years. “There is some sticker shock out there over the past 60 days,” said Brown. “Sellers haven’t got used to that.”
Brown said rates will probably rise more slowly than many are thinking they will. “Things will trickle up, and they should, but it will take more time,” he said.
Mixed-use development has grown in popularity, but this has not affected underwriting criteria just yet. “The more-urban markets are where we want to be investing our capital, and most of that space has some mixed-use component to it,” said Phillips.
This cycle does feel “long in the tooth,” Phillips noted, as retail property values dropped by some 15 or 20 percent in the U.S. last year. The market is due for a correction, he said, though adding that he is unwilling to issue any “what inning are we in?” predictions.