For Lenders, a Retail Location is Only as Good as Its Sales

Just because consumers might gravitate to a space doesn’t mean banks will. Retailers that are cool aren’t necessarily the ones with the best credit, making them harder to finance.

“We have this fundamental tug of war, where the lenders want credit and the people want cool,” says Melina Cordero, a managing director at CBRE, said on the company’s “The Weekly Take” podcast.

The challenge is to build retail destinations that please both lenders and consumers. “It’s a question of balancing,” Cordero says. “It’s also, I think, longer-term, a question of lenders adjusting to what the new retail reality is.”

For instance, Cordero says lease terms are different than they were 20 years ago. There are also different tenant types than there used to be. Additionally, some credit retailers are now trying to be cool, she says.

“You see companies like Lululemon that are buying or partnering with other firms that may be seen as newer, cooler,” Cordero says. “And so there’s a little bit of a blending going on. But fundamentally, it’s all about balance.”

But a retailer with good credit may not be what it used to be. During the pandemic, Terry Brown, co-founder and managing partner, Asana says even larger retailers became less reliable.

“I think we saw last spring we saw local retailers pay their rent and we saw national retailers not pay their rent until after very challenging negotiations,” Brown says.

Ultimately, the retailer’s and store’s credit is only as good as the sales that occur within the space. Even if a retailer has good credit, if sales aren’t happening, the store will be in trouble.

“The reality of it is the sales that are generated in the store, in my opinion, are way more important than the credit behind the lease,” Brown says.

Ultimately, the consumer matters most. If a retail landlord knows their customer, they can be successful. Then the financing takes care of itself.

“If you understand who the consumer is and you understand what they’re spending and what the drivers are, you’ll be able to minimize the vacancy,” says Brian Taff, CEO of Streetsense. “You’ll be able to create the vibrancy that you’re looking for.”

If retailers and restaurants can adjust to that customer and their changing preferences, they can still be successful and create value in that space. For instance, formal restaurants are offering takeout now to create value, according to Taff. “We also think those are things that are going to stay,” he says.