Retail Financing Flows to Favored Borrowers and Property Types
Nov 10, 2009 3:19 PM, By Beth Mattson-Teig
Following a year when getting a loan for a retail project seemed about as likely as hitting a Powerball jackpot, prospective borrowers are sensing that lenders may remove the vice grip on their purse strings in 2010. The big question is whether capital will flow only to a select group of institutional grade projects and borrowers, or if that pool of lucky recipients will expand.
“As a retail borrower, we faced multiple headwinds in 2009,” says Mark Garside, managing director at Columbia, S.C.-based Edens & Avant, a shopping center owner and developer. In 2009, retail real estate owners and developers found financing incredibly difficult to come by. The credit crunch has featured a virtual shutdown in the commercial mortgage backed securities (CMBS) market and a major pull-back from traditional lenders such as banks and life insurance companies.
In addition, the recession instilled fears about defaults that led lenders to embrace incredibly strict underwriting standards while demanding borrowers put more equity into any deal. This was especially true for retail where a collapse in sales and a rash of store closings and bankruptcies pounded fundamentals. “Lenders in general were wary of retail," Garside says.
But as 2009 progressed, "a lot of the traditional lenders—banks and insurance companies—slowly came off the sidelines." Many in the commercial real estate industry are hoping that the worst is over, and 2010 will bring gradual improvement. “I think as soon as we hit January 1 there will be a psychological shift, and more money will enter the market,” says Kenneth M. Fox, CCIM, a managing director at Chicago-based Cohen Financial. Although lenders remain conservative, there are signs that capital is loosening with more life companies and investment funds that appear to be returning to the table.
The big question for 2010 may not be how much capital is available for retail properties, but where the money will end up. Refinancing obligations will gobble up much of the available capital. More than $1.4 trillion in commercial real estate loans are scheduled to mature between 2009 and 2012, including $320 billion next year, according to ING Clarion Real Estate.
In addition, size may be a factor. Cleveland-based KeyBank has traditionally been one of the top lenders on retail properties in the country. It is too early to estimate the bank's final 2009 numbers or make projections for 2010, but it is clear that it has been extremely conservative in evaluating opportunities. The bank is focused on doing deals with existing clients to maintain those relationships.
“So most of our lending in the retail space will be concentrated with institutional clients with more of a corporate finance orientation,” says Daniel Walsh, executive vice president and managing director at KeyBank Real Estate Capital Markets. “I think 2010 is going to be very difficult, although I think capital is poised to loosen up to take advantage of distress in the market."
More money available?
In general, capital for commercial real estate remains less available and more expensive than it was at the peak of the market in early 2007. Across the board, mortgage rates are up 100 to 150 basis points compared to two years ago.
A quarterly index of originations produced by the Mortgage Bankers Association (MBA) came in at 53 during the third quarter, with 100 equaling the origination volume of an average quarter in 2001. In contrast, the index was at 116 a year ago and peaked at 352 in the second quarter of 2007. That puts 2009 well on pace to come under the total origination volume of $181.4 billion in 2008 and $279.1 billion in 2007.
The MBA's Retail Originations index shows that lending volumes are up from the lows set last year, but still have a way to go to recover. A score of 100 equates to an average quarter in 2001.
Similarly, the retail originations index was at 71 during the third quarter. That's down from 83 during the second quarter but higher than the figures of 43 and 47 posted in the first quarter of 2009 and the fourth quarter of 2008. For retail, the index peaked at 392 in the fourth quarter of 2006. The volume of retail loans in particular declined 68 percent from $71 billion in 2007 to $22.7 billion in 2008, and some experts predict that retail loan originations could be less than $15 billion in 2009.
According to a 2010 Banker Sentiment Survey by Jones Lang LaSalle, nearly 75 percent of the bankers surveyed said that they expect their commercial real estate loan production to increase next year. The majority of those lenders (85 percent) anticipate that their lending for properties, notes and new construction will increase by as much as 30 percent.
Banks in particular remain wary of their exposure to commercial real estate as the volume of distressed mortgages continues to rise. “In general, a lot of banks are looking to shrink their overall real estate exposure,” Walsh says. The delinquency rate on commercial real estate loans held by banks and thrifts reached 4.1 percent in second quarter and was expected to climb to 4.7 percent by the end of third quarter, according to Foresight Analytics in Oakland, Calif. If there is a thaw, it could be the product of growing confidence that the U.S. economy is pulling out of the recession. Consumer spending helped U.S. GDP grow at a 3.5 percent annualized clip during the third quarter. “If that continues, I can only imagine that lending would become—perhaps not looser—but a little bit more friendly as we go forward,” says Greg Genovese, president of the securities division at Thompson National Properties in Irvine, Calif.
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