It’s no surprise that as interest rates go up, financing options go down, with the lack of liquidity the biggest difference in today’s CRE market compared to 2022. Deal lead times are lengthening and volumes shrinking as capital works through the uncertainty.

While the consequences don’t end there, Chad Owens, Northmarq SVP and managing director, explains that market shifts have been a boon to the retail sector.

CRE Money Slides

Owens notes that banks have vacated their place in the market, especially in the middle market on acquisitions, development and transitional deals. This has left a noticeable void: where one to two years ago Northmarq would have multiple quotes after presenting the opportunity to their initial list of 10 to 15 select lenders, mortgage bankers must cast a wider net to find the right fit.

The discordant effects of the current capital markets environment can be found internally, as loan originators sometimes will not be on the same page with their credit teams. A borrower going directly to a lender might hear, for example, that 75% leverage on a deal is feasible, but then eventually be hit with a different, harsher reality.

“Just weeding through who’s actually an active lender and who’s telling you what is deliverable in today’s market are two big factors we’re seeing out there,” Owens said.

Retail’s Attractive Upside

Unlike office, retail has had a track record of reinvention in recent years, and its resurgent performance since the pandemic should inspire confidence during any 2023 turbulence. “Retail as an asset class is filling the void of deals that are less attractive today or do not pencil with today’s underwriting metrics,” said Owens. “Cap rates didn’t drop to the levels seen in the multifamily and industrial sectors, and fundamentals in the retail market, in general, have been strong, with low vacancy rates and strong rental rates. Retail has really gained tailwinds as an asset class for lenders and investors.” Owens reports that investor appetite is strong for both STNL assets and shopping centers, although he cautions that underwriting metrics favor multi-tenant retail as STNL investors should be wary of negative leverage scenarios. By comparison, office has been struggling for years, and multifamily’s extremely low cap rates don’t complement the direction of borrowing costs.

Filling some of the void left by inactive banks, life companies have stepped to the forefront of lending activity as a result of allocations that are hungry for deals. And though volatile, CMBS is pursuing retail to diversify securitizations that have filled up on office, hospitality, self-storage and other asset types.

“We’re also seeing lenders adjust as requests from borrowers change,” Owens said. “With a lot of investors targeting three- to five-year terms with the expectations that rates will come back down, lenders are providing more short-term options and also trying to create flexibility whether through step-down, pre-pay or other creative options to meet that demand in today’s market.”


Owens says CRE capital markets will likely see “more of the same” in the second and third quarters, with rates staying put or inching up a bit. That may change in the fourth quarter if deal volumes increase from investment funds pushing to meet their annual targets and some sellers get eager to actuate their exit strategy. In the meantime, retail players will accentuate their positives.

“We are seeing more borrowers come to us that are not able to get debt from their traditional bank relationships,” Owens said. “As a mortgage banker, these opportunities to provide new lending relationships and types of capital that borrowers haven’t accessed in the past have been welcomed.”