And somewhat surprisingly, even unpopular retail property types such as enclosed malls aren’t receiving an immediate thumbs down from lenders.
When I call a lender and say that I have an enclosed mall, they’re not hanging up on me anymore. They’re asking for details, Steeb notes. Retail ily or industrial, by any stretch of the imagination, but nothing is off the table.
Loan originations for retail properties increased by 73 percent in 2021, according to preliminary data from MBA. The retail sector ranked second behind industrial, which saw originations increase by 140 percent.
The increase in originations can be attributed both to acquisition cash advance loan Illinois and refinancing activity. Retail investment deal volume rose to $76.9 billion in 2021, an 88 percent jump compared to the previous year, according to Real Capital Analytics (RCA), a real estate data provider. RCA attributed some of that rebound to one-off entity-level transactions. However, when focusing only on individual asset sales, volume was up 65 percent in 2021 compared to 2020.
Of course, the pandemic skewed the year-over-year comparisons. To provide a more comprehensive view, consider the five years though 2019, when deal activity in the retail sector averaged $77.2 billion. Deal volume for 2021 is in line with previous trends and certainly higher than during some recent years, according to RCA.
On the refinancing front, it’s not just loan maturities driving borrowers to seek new loans, Melody says. Though tens of billions in outstanding retail property loans will mature this year, according to MBA, many borrowers are refinancing several years before their loan comes due because they’re worried about interest rate hikes that economists have predicted over the next 12 months.
Even prepayment penalties aren’t enough to dissuade borrowers from refinancing, Melody says. Borrowers are doing the math, comparing the prepayment penalty to the amount they’d have to pay if they refinanced their loan at a higher interest rate.
A prepayment penalty might look significant on the surface, but if a borrower is going into a new 10-year, fixed-rate loan, that pre-payment penalty is amortized over 10 years, Melody says. It might be 25 to 30 basis points, but if you think rates are going to go up 100 basis points or more, it makes sense.
Currently, spreads for floating-rate loans are LIBOR plus 200 to 300 basis points, and spreads for fixed-rate financing are T-plus 200 to 300 basis points. 0 percent or lower.
The reality is that sometimes the market is not great when borrowers go to refinance, Melody adds. It’s really good right now, and there’s a bunch of folks who want to take the risk off the table and be able to sleep at night instead of worrying where rates will be in two years.
Increased retail allocation from all lenders
The good news for retail property owners is multiple sources of debt financing are available today. Banks, life companies, CMBS and investor-driven debt funds are all actively lending for retail properties, and most have increased their allocations in recent months.
For longer term, fixed-rate loans on stable retail properties, life companies and CMBS lenders remain an attractive and viable option, Steeb says. Both offer non-recourse loans, though life companies are playing in the 50 to 60 percent LTV range, while CMBS is stretching to 70 percent LTV.
The all-in rates for both floating and fixed-rate loans still look attractive-roughly 4
CMBS is an interesting story right now, Steeb says, noting that issuers are more focused on protecting the pools from anything that can go wrong. They’re structuring around anchor tenant expirations with increased reserves to make sure the borrower has the funds necessary to re-tenant the property if the anchor doesn’t renew. That’s an improvement over the past couple of years where they wanted interest reserves and debt service reserves.