Lenders Warm Up to Retail Leasing Deals

Lenders are warming up to retail leasing deals. The market has undergone a substantial evolution this year, and lenders now understand the new market dynamics and what makes retail work. As a result, lenders are now showing an increased appetite for retail deals, which will materialize this year.

“We are seeing a very strong appetite for lending on retail properties,” Ben Townsend of SRS Real Estate Partners’ debt and equity team, tells GlobeSt.com. “Rates recently hit all-time lows so lenders are adjusting their internal pricing to remain competitive in this market. Lenders understand that as the retail market changes, underwriting and lending parameters need to adjust with it. As a result, there has been an increase in programs that are specifically tailored for retail as lenders look to increase the percentage of retail loans they provide in order to balance and diversify their loan portfolios.”

Current market fluctuations have big implications in retail lending activity, and there has been an increase in borrower demand for retail. “The 10 Year Treasury just hit an all-time low due to corona virus fears and its potential repercussions. As such, there has been a strong increase in borrowers looking to secure extremely aggressive financing,” Matt Marlin also of SRS Real Estate Partners’ debt and equity team, tells GlobeSt.com. “We see that momentum maintaining and likely increasing in pace throughout 2020.”

These market dynamics have also impacted lenders, who have had to implement stricter lending guidelines. “Lenders have started to enforce stricter underwriting parameters for certain tenant types,” says Marlin. “Specifically, single-tenant deals with shorter lease terms and weaker tenant guarantees. These deals are being analyzed more thoroughly as value is directly related to length of lease and strength of the tenant. These are depreciating assets because as the lease shortens, the value decreases due to less security.”

This year, interest rates—which were cut again by 50 basis points this year—should remain low, but the presidential election is infusing uncertainty in the market. “The Fed recently cut rates by 50 basis points, which was a bit unexpected. Couple that with 2020 being an election year, and the markets are reacting accordingly,” says Marlin. “When there is an election year there is uncertainty in the marketplace, so many investors buy the safest investments possible which are treasuries. The more treasuries that are bought, the lower rates get. We do not know if a republican or a democrat will be elected and therefore we do not know what policy changes we need to prepare for in 2021. Rates continue to remain at all-time lows due to political uncertainty at home and abroad. With this low interest rate environment becoming the new normal, lenders must constantly compete with each other in order to provide borrowers with the lowest rate possible.”