Financing Your Next Retail Project in Today’s Lending Market

By Shlomi Ronen, Founder & Managing Principal, Dekel Capital: In a constrained lending environment, how can retail property developers secure financing for their upcoming projects?

Shlomi RonenThe slowdown of retail sales in brick-and-mortar locations, combined with the slew of retailers closing operations and current regulatory pressures, have constrained the availability of capital for permanent, bridge and construction lending for retail properties. Here is a deeper look at some of these factors and how they’re impacting the lending market for retail financing.

Policy Implications for Retail Property Lending

Amidst the Fed’s protraction on rate hikes, lenders may have been inclined to maintain or increase their volumes of loan issuance, focusing on redevelopment rather than new brick-and-mortar construction. Yet, due to the regulatory implications posed by Basel III’s reserve requirements, most lenders are saving their available capital for longer-term and already existing lender-borrower relationships. The Fed’s data-dependent approach to interest rates is stirring continuous uncertainty in money markets, as macroeconomic signals have been mixed for the past three quarters. That has resulted in a greater capital allocation into haven assets rather than property investment, and subsequently, a broader slowdown in retail real estate development.

What Retail Lenders Care About

E-commerce is continuing to affect traditional retailers, as non-store retail surged 14.7 percent, according to U.S. Department of Commerce data. The growing shift in shoppers’ lifestyles is weighing on sales-per-square-foot performance of B-category stores, such as Target and Wal-Mart, complicating their financing. Consequently, as retail properties face declines in sales, lenders are limiting financing to only the best-performing assets.

Today’s lenders are increasingly focused on tenant commercial performance, and specifically on sales, occupancy costs and rollover. Class A and B retail assets that meet a minimum of $350 per square foot in annual sales or display lower lease rollover potential during the term of the loan have better chances of securing loan financing. Tenants with lower occupancy costs also ease lenders’ concerns over their solvency.

As such, lenders are currently more inclined to finance grocery-anchored properties that offer on-site services such as nail salons, restaurants and fitness centers, which help drive foot traffic and increase overall sales. Shadow-anchored retail centers adjacent to grocery-anchored centers are also of interest to lenders.

Putting These Factors to Work

In recent months, Dekel Capital has been out to market for permanent and construction financing on separate retail projects, and it’s been seeing the general lender sentiments detailed above. Dekel has managed to successfully source financing for numerous retail property developers from debt funds, banks and conduit lenders, based on strong pre-leasing positioning, credit tenants and retail performance. Currently, permanent financing is highly attractive for retail property types meeting the above criteria, with rates in the high-3 percent to mid-4 percent range and leverage between 60 and 75 percent. As banks are affected by higher reserve requirements, debt funds are filling the bridge and construction void by expanding their programs for ground-up and bridge projects, with rates ranging from L-4%-plus and a general loan-to-value level of 65 to 75 percent.