Retail Lending Remains Active Despite COVID Woes

While retail has taken the brunt of the coronavirus’ repercussions, that hasn’t stopped refinancing within the sector. Although it is true that various stay-at-home orders hurt retail investment sales transactions in the early days of the pandemic, insurance companies and local bank lenders kept capital at the ready for retail refis.

“There is a myth that retail is unfinanceable today and that’s absolutely untrue,” said Christopher Drew, senior managing director, capital markets, JLL Americas. “When structured appropriately, plenty of financing is available to investors. In fact, certain lenders like local and regional banks never stopped lending. Lenders seek the same characteristics for retail that investors pursue, which is well-located assets with essential tenancy.”

This means lenders and investors are often looking beyond primary markets and for opportunities such as grocery-anchored retail with limited competition. They are also interested in strong sponsorship which plays a vital role in closing transactions, because lenders evaluate whether a borrower can maintain the property and tenant relationships.

Demonstrating the lending community’s confidence in segments of the retail sector, JLL capital markets retail debt placement teams closed $542.83 million worth of retail financings since July. And, of the 29 JLL retail transactions closed between July 1 and November 30, 2020, 12 were grocery-anchored retail assets. The remaining loans were a mix of non-grocery-anchored, shadow-anchored retail, retail condominiums and single-tenant assets.

For all of the transactions, the average loan-to-value was 62% with an average interest rate of 3.96%. Grocery-anchored deals had an average LTV of 63% and average rate of 3.79%, with an average loan term of 10 years.

These refinances have been especially prolific with this year’s historically low interest rates. And, those record-setting interest rates are bringing new investors who see an opportunity to expand holdings and balance out portfolios with retail acquisitions, possibly at a discount, according to Claudia Steeb, managing director, capital markets, JLL Americas.

She also points out that flexibility is vital to retail lending.

“Even though we are working with all types of lenders, insurance companies and local and regional banks are paving the way toward getting retail deals done in 2020,” Steeb explains. “They have flexibility, tend not to have significant exposure in any particular asset class and are able to arbitrage the market so when competitors pull out, they can jump in and gain extra yield for their portfolio.”

Steeb says JLL is seeking out other lenders such as bridge lenders, debt funds and CMBS underwriting well-located retail assets with strong sponsorship and existing supportable cash flow. These types of lenders may be able to sell loan committees and/or rating agencies on retail loan opportunities.

The retail lending outlook is showing additional positive signs. Lender focus is expanding beyond grocery-anchored properties to include assets tenanted by discounters, essential and Internet-resistant retailers. Moreover, while many of the loans have been smaller in size, JLL debt placement teams are starting to identify more interest in larger retail loans.

To be sure, access to debt capital has been far more abundant than during the global financial crisis, because the Fed took extreme steps to shore up credit markets and ensure liquidity flows. In fact, lenders are still working with retail borrowers to provide payment relief for troubled assets, limiting foreclosures and greater price fluctuations. New lending for more impacted segments, including smaller restaurants, gyms, movie theaters and hotels, face a significantly shallower lender pool and lower LTVs due to the elevated delinquency risk of these assets, according to a recent report by Marcus & Millichap.