Retail Financing Flows to Favored Borrowers and Property Types
Nov 10, 2009 3:19 PM, By Beth Mattson-Teig
Tougher underwriting
Ultimately, the commercial real estate industry as a whole is going to need more than one solution to fix the credit crisis that has stymied investment activity. Government programs, more participation from life companies, and hopefully, a revival of the CMBS market—even on a limited basis, will all help to thaw the frozen capital markets. “The solution to capital returning to the marketplace is going to come from a number of different sources, some of which we haven’t seen yet,” Hughes says.
Some industry observers are hopeful that the government’s Term Asset-Backed Securities (TALF) program will have a positive impact on the CMBS market. There are a number of issuers, such as the Royal Bank of Scotland, that have said they are bringing transactions to the market. Those deals could provide a much-needed kick start for capital markets. “When that happens, I suspect that it will tend to loosen things up in the financing arena, and we will have some limited CMBS issuance in 2010 with multiple asset and multiple borrower pools,” Hughes says.
In addition, there are a few single-borrower TALF-backed deals in the works for REITs such as Developers Diversified Realty Corp., Inland Western Retail Real Estate Trust Inc. and Vornado Realty Trust. Although the Federal Reserve has been wary of the risks associated with supporting a single-borrower offering, DDR is reportedly moving ahead with its proposed deal. The REIT announced in early October that it had obtained a $400 million loan from Goldman Sachs Group Inc.
In the end, the goal is to convert that loan into a private CMBS offering through the TALF program. Although borrowers are hopeful that more capital will be available in the coming year, there is no indication that lenders are planning to budge on staunch underwriting practices. Lower leverage, recourse loans and greater property scrutiny are all in the cards for 2010. Two years ago, the typical leverage on stable retail properties was 70 percent to 80 percent. Today, 50 percent to 55 percent loan-to-value ratios are the norm, with properties being valued at an 8 percent cap rate. Inferior properties are seeing even lower loan-to-value ratios and being valued at higher cap rates.
Life insurance money in particular is focused on very low leverage deals, best-of-class retail, such as drug or grocery-anchored retail with good history. The insurance companies are wary of centers where there is exposure to risk, such as a large tenant that is sitting on a short-term lease. “You need to have sound tenancy, solidly leased properties with rent rolls that have some duration left on the tenancies,” Fox says.
Those banks that are still loaning on retail properties are offering recourse only loans at between 55 percent to 65 percent loan-to-value. Generally, banks are only offering fixed rate deals with 5-year terms at rates in the mid to high 6s. After that the loan converts to an adjustable rate loan for a balance of typically 10 years.
Even if capital markets loosen in 2010, the environment for retail property financing will continue to be very, very challenging. Lenders will continue to gravitate to best-in-class properties and borrowers. “You want to have good sponsorship, because right now all companies are under some level of stress with the economic downturn,” says KeyBank’s Walsh. “So you have to partner with people you know are going to be there for the long haul.”
Average cap rates on retail properties continued to rise during the third quarter and are now near 8 percent. The price per square foot on completed deals, however, is no longer falling.
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