Alex Finkelstein is co-editor of Debt & Equity Journal, from which this article is excerpted.

Chicago—Shopping centers, especially those anchored by quality grocery stores, continue to be at the top of most investors' shopping lists and are also the product of choice for many lenders, according to a random survey of lenders, brokers and owners conducted by Debt & Equity Journal.

New trends are also surfacing in retail development. "A major shift continues from enclosed mall development to lifestyle and community and neighborhood centers," says Nat Zvislo, research director at the locally based Real Estate Capital Institute. "Within most urban areas, infill properties remain the priority for many developers seeking to serve the intercity market."

Richard Klepal Jr., a vice president in the Tampa, FL office of CBRE | Melody says the capital markets continue to demonstrate strong demand for both equity and debt in institutional grade retail investments. "Commercial mortgages today offer low lender spreads. With the 10-year Treasury below 5%, the rates remain very attractive," he adds.

David Goldstein, a senior investment associate in Marcus & Millichap Real Estate Investment Brokerage Co.'s Tampa office, agrees. "The spreads are still holding," he says. "Typically, when the interest rates start to drop, the spreads begin to widen. But investors are still seeing lower rates with narrow spreads."

Charles Anderson, a senior investment broker in the Coral Gables, FL office of Continental Real Estate Cos., sees "a tremendous amount of liquidity in the market for retail centers, especially well-located grocery anchored centers." He says he and associate Harry Blyden "have seen lenders quoting spreads at below 100 basis points to the 10-year Treasury. This is indicative of not only the lender's appetite for this product, but the secondary market as well."

Zvislo of RECI says extremely low-leverage properties are attracting pricing as low as 75 to 80 basis points over comparable-term Treasuries. "More typically leveraged properties of 75% to 80% are capturing spreads of 90 to 130 basis points or more over comparable-term Treasuries. Higher-risk, redevelopment, high-leverage and similar loans are priced within the 140 to 160 basis point range," he adds. At the same time, he notes that mezzanine-level financing and other subordinate mortgage debts "are climbing to the mid-to-high hundreds."

Lenders continue to have a strong appetite for credit-anchored retail projects, says Lane L. Hamilton, senior vice president in the Denver office of KeyBank Real Estate Capital. Lenders are influenced by three main factors: strong consumer spending, improved credit quality for the anchor tenants and higher replacement costs, he explains.

He says credit quality for the anchor tenants has generally improved over the last cycle, with a clear delineation of the winners in the basic categories. This makes the underwriting of the anchors easier with a clearer picture for future performance. In addition, construction costs have risen dramatically over the past several quarters. "As the cost for delivering a new center rises, so must the corresponding rents. That makes existing centers more affordable and more attractive to tenants," he explains.

Craig Macnab, CEO of Orlando, FL-based National Retail Properties Inc., thinks at least five factors make shopping centers the top choice of lenders and investors. Stability leads the list. "Anchors have long-duration leases and are creditworthy," Macnab says. In addition, releasing is generally easy. Unlike apartments and office product, shopping centers are rarely built speculatively. "Typically, you have contracts for 60% of the gross leasing area before contracting for the land," Macnab explains, adding that shopping centers have "low historic loss ratios for capital providers."

Gary M. Ralston, president of Florida Retail Development LLC, notes there are several additional factors why shopping centers are favored by lenders. "First, many retail properties are structured with net leases. Therefore, a large measure of real estate operating risk, especially real estate taxes and insurance, are not the responsibility of the owner. So the lender does not need to consider such items in the loan underwriting." Secondly, Ralston says, many retail properties include regional and/or national retail companies. Because most of them are considered creditworthy, there is less risk to the lender.

Todd F. Cohen, director of Primary Capital Advisors' income property capital group in Orlando, FL agrees. "Typical loans for retail centers include up to two to five years of interest only and are written with 30-year amortizations," he explains. He says his firm can lock in rates well in advance of loan closings, typically at interest rates of 5.75% to 6.25%, depending on the loan-to-value factor.

Sarah D. Vandagriff is president of Vanguard Commercial Realty Inc. in Daytona Beach, FL and vice president of the Jaffe Corp., an Ormond Beach, FL development company specializing in lifestyle and grocery anchored shopping centers. Shopping centers are attractive to investors, she explains, for multiple reasons. "Once you have a strong project, the location, location, location rarely seems to diminish as you might find in multifamily, office, industrial and many other forms of commercial development," she notes.

Additionally, Vandagriff says, grocery anchored neighborhood centers "provide goods and services that people need, whether or not they can afford a newer house, car or larger apartment. The category killers like Target Corp. and Wal-Mart Stores Inc. provide economic alternatives in bad times for lower- and middle-income shoppers. And the very high-end retail does not seem to be affected by economic downturns that affect the low-middle income shoppers."

Bruce Nelson, vice president of investment sales in the Long Island, NY office of CB Richard Ellis Inc., says he knows exactly why retail remains the choice of investors and lenders in the suburban New York City area. "Retail is underserved here," he says. "Most supermarkets are well-leased, in high demand and family owned. Because of these factors, investors are paying premium prices, anywhere from $250 to $300 per sf. Cap rates are in the low 6% to 7% range."

Jim Michalak, managing partner of Plaza Advisors in Tampa, FL says retail was historically the least desirable real estate investment, explaining, "Part of the undesirability was the lack of credit for mom-and-pop retailers, Chapter 11, business failures and the overall dynamics of this asset class." Today, however, retail has become a product of choice because of sustained and robust consumer spending "Overall, retailers have done very well during the past five years and rental rates have increased substantially, making the operating income growth rate very attractive," he says.

Instant Insights /

Lenders, Investors Love Shopping Centers

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