Lenders See Momentum In The Marketplace
The retail lending market continues to steadily strengthen in most areas, mirroring the changes in the overall economy. We asked lenders in major markets what they're seeing, and what they expect in 2006.
Lara Fuller

As far as hot property types go, retail stands out from the crowd. Even in times of economic slowdown, retail properties often fare better than most. And when the economy gains momentum, as it has over the past few years, retail shines even brighter. This year, investors and developers will continue to build on the retail growth that is occurring in many areas of the country. Shopping Center Business recently spoke with several banks and lending institutions to find out what 2006 has in store.

Market Outlook

There is no shortage of readily-available capital in the retail real estate market. Borrowers are looking for a number of loan products for a range of retail uses. Steady growth is predicted for 2006, keeping the year on track with the strengthening market that emerged over the past few years. Though the future of retail looks bright, there is one shadow hovering over the market. Interest rates have steadily climbed over the past couple of years, though the rate at which they have increased has been relatively slow. Combined with the fact that these increases had been predicted by most in the retail world, the effect of the rising rates isn't all that drastic.

“Real estate is a very mature market filled with very sophisticated players,” says Nate Stearns, managing director and chief operating officer with LaSalle Bank in Chicago. “Even as interest rates rise, people in the business are going to continue to look for and find deals that make sense as they bring their expertise to unique properties. In addition, balloon loans (CMBS and otherwise) are such a significant portion of all loans that refinancings are going to occur even if rates rise.”  

Says Tom Aschmeyer, managing director with RBS Greenwich Capital in Atlanta, “The rise is primarily confined within short term rates, which pushes borrowers off floating rate bank debt to the permanent market. A controlled increase in long term rates will be addressed through modified assumptions by real estate operators and investors.”

Dan Smith, senior vice president of North American debt with GE Real Estate in Dallas.

In general, the retail market will continue its upward swing, despite what interest rates may or may not do. “We feel that 2006 will be another good year for the financing of commercial real estate, although not as ‘frothy' as 2005,” says Gary Bechtel, managing director with Irvine, California-based Johnson Capital. “The continued/potential increase in interest rates will not have a great effect on the amount of transactions that are financed, especially given the amount of loan products available today that were not in existence 5 to 10 years ago when a number of the loans that will be maturing were originated.”

Major Markets

While retail is predicted to do well across the board in 2006, there are certain areas attracting notice from developers and borrowers alike. Major markets are still the hottest areas when it comes to retail lending, whether on the East Coast, West Coast or anywhere between. “In the past, much of the loan activity took place on either of the two coasts, but we're now seeing increased volume for all types of loans across the country,” says Smith.

Tom Aschmeyer, managing director with RBS Greenwich Capital in Atlanta.

“Eurohypo has really witnessed a full nationwide trend for origination of retail loans, particularly in the major markets,” says James Howard, managing director with Eurohypo AG in New York. “However, we have not recognized any particular weighting in terms of one geographic area over the other.”

Of the major markets, Southern California, southern Florida, New York, Washington, D.C., and parts of Texas are the hottest at the moment, says Smith.Bechtel at Johnson Capital sees a similar trend, with Northern and Southern California, as well as the Phoenix, Denver, Washington, D.C., and New York metro areas showing themselves as some of the strongest in the United States.

And while retail in many of the major markets is looking up, a number of the secondary markets are not doing as well. “Some of the secondary markets are struggling, especially in areas where Wal-Mart has taken business away from traditional grocery stores,” says Smith.

Adds Aschmeyer, “You still see a lot of consolidation in the secondary markets where a Super Wal-Mart can have a negative impact on local businesses, especially if you have stagnant population growth in those areas. However, we have also seen many retailers making changes to compete in that environment with service, convenience and product differentiation.”

Popular Products

As retail developments will continue to pop up in both major and secondary markets across the country, lenders have found themselves handling a number of different loan types, including fixed and floating rate loans, permanent loans, CMBS loans, mezzanine financing, high leverage loans, acquisition loans and construction loans. The most popular loan types vary between lenders and differ from market to market.

Marty Lanigan, president and chief executive officer with Mezz Cap.

Stamford, Connecticut-based GE Real Estate currently offers floating and fixed rate loans with 3-, 5-, 7- and 10-year terms, which are often the most popular retail products due to their flexibility, says Smith.

LaSalle Bank has also seen a number of 5-, 7- and 10-year fixed-rate loans, in addition to CMBS loans.

At Johnson Capital, the bulk of the retail transactions that the company arranged were long term, fixed-rate financing.  

Fixed-rate is also at the top of the heap at Greenwich, Connecticut-based RBS Greenwich Capital. “We have seen a defined shift to fixed rate loans with the flattening of the yield curve,” says Aschmeyer. “Borrowers are looking to take down very low rates on a permanent basis even if it provides less prepayment flexibility in the future. Shorter term maturities, such as 5-year loans, have been increasing although 10-year maturities remain the most desirable product.”

Moving Forward

Overall, 2006 is expected to be a good year, with the potential for retail growth apparent in almost every market. “There are good deals in every market, and there are bad deals in every market,” says Lanigan. “The key in lending and underwriting is appropriately understanding the risk associated with a given property, borrower and market, and mitigating those appropriately so the deal makes sense for both the lender and the borrower.”

As the market changes, lenders are prepared to adjust their underwriting criteria accordingly. At the moment, however, rising interest rates are not expected to have any major impact. “There are still several points of interest rate increases that can occur before I believe there will be much impact on property values,” says Stearns.

“We are expecting more of the same in 2006,” says Aschmeyer. “The investment sales market has a lot of momentum and a lot of money looking for a home. This will be a significant driver for new loan business in 2006. Additionally, the refinance market is a solid play for non-sellers, which can still make economic sense after paying defeasance cost on a seasoned loan that may be maturing in the next 3 to 5 years.”

Nate Stearns, managing director and chief operating officer with LaSalle Bank in Chicago.

Bechtel echoes the sentiment, saying “I expect 2006 to be another good year, although probably not as good as 2005. There is still an abundance of capital of all types and capital sources are aggressively pursuing projects that make sense.”

While no one can predict just how the rising interest rates will affect consumer confidence and spending, the retail market should remain solid, says Smith. “The retail lending market remains strong and barring unforeseen developments is expected to continue to growth throughout 2006,” he says.

Adds Lanigan, “As the economy continues to strengthen, retail, and specifically neighborhood and anchored centers should do well generally. There are some pockets around the country where broad-based unemployment layoffs in certain industries could create some challenges. Given the impacts of information technology on the business, and the ability for retailers to more quickly understand and adjust to market demand dynamics, I think retail will successfully manage most of these challenges.”