It's a veritable love-in between lenders and owners of retail real estate these days. While banks and institutions are tightening lending criteria to reduce the risk of defaults by other commercial property owners, the retail sector is being ardently wooed. You want the best rates? No sweat. A higher loan-to-value? Sure. Whisper the magic words “neighborhood shopping center,” and the sky's the limit.
So, how good are the deals? In January, Donahue Schriber received permanent financing on a 375,000-square-foot power center in Roseville, Calif. The lender, Teacher's Insurance and Annuity Association of America, went to 70 percent l-t-v, or $65 million.
“We built the property for around $40 million out-of-pocket, plus an equity piece of $8 million,” says Lawrence Casey, chief financial officer for the Costa Mesa, Calif.-based developer. “So, we were able to pay off the construction loan completely using these proceeds.”
Interest rates have remained very low and, with the retail sector stabilizing, fixed-rate loans on investor-favorite, grocery-anchored neighborhood shopping centers are currently just above the 5 percent range. That's based on a spread of 180 to 195 basis over the 10-year Treasury, which in middle of June hovered in the 3.40 percent range. The market for retail has been so buoyant that spreads on interest rates have been narrowing.
Generally, for lenders, the best spreads are for apartments, followed by grocery-anchored retail, other retail, office, and then lodging. For example, a very good multi-tenanted office deal with sequential expiration of leases might go with a spread of 180-200 basis points, but the average office deal is 20 basis points higher. The very best lodging deal would attract spreads of 250-275, but most would be in the 300 basis point range, reflecting that sector's distress.
“For retail, fixed-rate loans are about 50 basis points cheaper today than a year ago,” observes William Hughes, a senior vice president with Marcus & Millichap. Low cost, floating-rate loans are cheaper today than a year ago, too. Shopping center owners can get a short-term floating rate at a spread of 160 to 300 basis points over LIBOR, which at mid-June came in about 1.06 percent for a three-month LIBOR (London Inter-Bank Offered Rate).
“There is still a strong demand for ‘floaters,’ but we have treasuries at a 40-year historic low, so this is a good time to lock in low rates with a long-term, fixed rate mortgage,” says Dave Koletic, a director in mortgage origination and placement for Wachovia Securities.
For financing, there's even more goodin the retail sector: Loan-to-value ratios have been inching up to as high as 85 percent. It's now common to see l-t-v ratios of 80 percent, compared to 70 percent to 75 percent a couple of years ago.
The sweet terms are a result of competition by lenders and investors. “There seems to be a lot of capital flowing into retail real estate, which is a good trend because more capital means better transactions,” says Tom MacManus, president of GMAC Commercial Mortgage's North American operations in Horsham, Pa.“Well-anchored community shopping center are getting the most favored treatment today. These can get 80 percent l-t-v, whereas traditionally it might have been 75 percent l-t-v. Our conduit operation would do an 80 percent l-t-v on a high-quality retail center.”
Conduit lenders, which eventually securitize their loans, have been particularly aggressive, prodding traditionally conservative lenders, such as life insurance companies, to be a bit bolder. The insurers may not go to the max, but “you can get them to 80 percent,” says Todd Stressenger, a senior director for Holliday Fenoglio Fowler LP in Boston. “They are really doing that to compete with the CMBS lenders and even those deals are primarily ones where there is a grocery-store anchor that is one of the top two or three in that particular market.”
The deals depend on the type of center and its circumstances. Assuming “A” quality, however, owners can expect the following:
A solid neighborhood shopping center should be able to get 80 percent l-t-v. Some lenders may even go as high as 85 percent.
Loans to power centers depend on size. As deals go above $40 million, expect l-t-v to be in the 65 to 70 percent range. Smaller power centers can get 75-80 percent.
There has been little new mall development, but mall redevelopment l-t-v could go as high as 70 percent.
Last year, there was some concern among lenders about neighborhood and community shopping centers, which have been fetching record sale prices, even as vacancy rates drifted up. Vacancies in neighborhood and community centers climbed from 6 percent in between the first quarter of 2001 to 7.1 percent in 2002, according to REIS in New York. But the outlook has improved. In the first quarter of this year, vacancies for the neighborhood and community shopping center sector came in at 6.8 percent.
As long as the lenders are eager, borrowers are enjoying the benefits. Vestar Development Co. opened the 830,000-square-foot Chino Spectrum Marketplace in Chino Valley, Calif. By October it was refinanced. Chino Spectrum cost about $77.2 million to build, says Edward Reading, vice president of finance for the Phoenix-based retail development company, and the permanent financing was at a tidy 80 percent loan-to-value. But, by selling a couple of pads to Wal-Mart and Sam's, Vestar effectively reduced its cost to $63 million and with the permanent loan in place, “we financed out almost all of the equity,” says Reading. Vestar's permanent financing modus operandi is to hire a mortgage broker in the development's back yard. Mostly, it has been seeing conduit loans that offer l-t-v ratios in the 75 percent to 80 percent range.
Lenders are even willing to take the risk on projects outside of general retail categories. Bank of America, for example, financed what it calls the largest free-standing, outdoor shopping center in the United States. Built in Chesterfield Valley, Mo., and developed by THF Realty of St. Louis, it's measured in square miles, 3.4 to be exact, says Vincent Luongo, senior vice president of BofA's real estate banking group. BofA financed 80 percent of the $100 million project cost.
That was a unique opportunity, because BofA mostly does neighborhood type deals, a center that's 100,000 to 160,000 square feet and costs $12 million to $15 million. That type of project, says Luongo, is generally at 75 percent l-t-v. BofA would do this kind of project again, says Luongo, “but it would depend on the tenant base, barriers to entry and some other matrix, such as the competition.
The amount and type of financing often depends on project's size — and it's the same with l-t-v. “An $80 million power center is going to find it difficult to get 70 percent to 80 percent l-t-v,” says David Durning, a managing director of Prudential Mortgage Capital Co. “On a $40 million project, you are more likely to get that 80 percent l-t-v.”
Recently, Prudential Mortgage Capital financed a $49 million project, the redevelopment of Ballston Common Mall in Arlington, Va. L-t-v on the deal was 75 percent, but there were two parts. Actually, it might be fair to say, l-t-v was 70 percent and that loan was securitized. The remaining 5 percent was a mezzanine piece, which Prudential Mortgage Capital also financed and put on its books.
Getting great terms for top-quality retail properties is a trend that should persist, analysts say. Plenty of financing is available for all retail developments “simply because of the enormous liquidity in the retail sector as compared to elsewhere,” says Koletec of Wachovia. “Investors of both debt and equity are looking for good quality retail.” And the borrowers can call the tune.