Lenders Prefer Multifamily and Industrial Over Retail

Posted on September 25, 2015

Even though the retail sector continues to strengthen, lenders don’t find retail properties as attractive as they find multifamily and industrial assets. With the exception of grocery-anchored centers and fortress malls, lenders are cautious when it comes to retail real estate, experts say.

“Everybody wants multifamily and industrial,” says Bryan Gortikov, principal at George Elkins Mortgage Banking Co. “Retail is a distant third. It’s not the preferred product type, unless its grocery-anchored retail in an A or B market—then it’s up there with industrial.”
But that doesn’t mean that retail owners can’t get loans if they need them. “There’s more money now than there has ever been in my career,” contends Marcia Diaz, managing director at Prudential Mortgage Capital Co. “[Lender] appetites for commercial mortgages have grown significantly over the past five years, and deals are getting done. I don’t think there are any problems getting retail financed.”

Retail lending originations increase

Recent research from the Mortgage Bankers Association underscores lender sentiment toward retail properties. Lending activity for retail asset mortgages rose in second quarter, according to the association’s Q2 2015 Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.

Retail mortgage originations rose 17 percent from the prior year. However, growth in mortgage lending was smaller for retail than for most other property types. It also fell short of the overall year-over-year increase for all commercial mortgages (29 percent).

While the level of commercial/multifamily mortgage debt outstanding increased by $38.5 billion (roughly 1.4 percent) in the second quarter 2015 over the first quarter, the bulk of the increase came from multifamily lending. Multifamily mortgage debt outstanding rose to $1.0 trillion, an increase of $23.6 billion, or 2.4 percent, from the first quarter. Total commercial/multifamily debt outstanding stood at $2.72 trillion at the end of the second quarter.

“The total amount of commercial and multifamily mortgage debt outstanding continues to grow at a strong pace, particularly on the multifamily side,” according to Jamie Woodwell, MBA’s vice president for commercial real estate research. “For the first time ever, multifamily mortgage debt outstanding now exceeds $1 trillion and is growing at almost 10 percent per year.”

Volatility in conduit market

During the second quarter, three of the four major investor groups increased their holdings in commercial real estate mortgages. The four major investor groups are: bank and thrift; CMBS, CDO and ABS issues; federal agency and GSE portfolios; and life insurance companies.

During the peak lending years of 2005 to 2007, conduits reigned over portfolio lenders. Borrowers flocked to CMBS because the pricing and terms were better and the LTV ratios were higher.

Today, the playing field is level, Diaz contends, because CMBS doesn’t have a pricing advantage. In fact, portfolio lenders can often provide better pricing, even in secondary and tertiary markets.

“The situation has flipped,” Diaz points out. “There’s more of a risk premium for CMBS than there used to be and in my opinion, the market for CMBS is priced appropriately. There should be a risk premium for CMBS.”

Gortikov says it’s a great time for portfolio lenders because they can pick and choose the deals they want to do. And it’s not just about competitive pricing, he points out.

Portfolio lenders can offer certainty of execution—something that many conduits cannot do right now given the volatility from the stock market gyrations and concerns about China’s lackluster economic growth, Gortikov says. “The conduit market has been fairly stable for the past four years, but it’s very volatile right now,” he notes. “I think it will settle down again. But right now, it’s a terrifying places for borrowers to hang out.”

Uncertainty regarding specific retail property types

For decades, borrowers with grocery-anchored centers have been the prettiest girls at the dance and they have plenty of partners from which to choose when they need capital.

“The favorite retail property continues to be grocery-anchored retail, or necessity retail,” says Claudia Steeb, a managing director in HFF’s Pittsburgh office.

Other property types within the retail sector have their own set of issues that concern lenders. At one time, lenders considered power centers and lifestyle centers very attractive. But now that those property types have more history behind them—proof of how they perform during a recession—they’re just a little less desirable.

When it comes to power centers, lenders are most concerned about the health of the big-box tenants. “A lot of those tenants—those category killers—they’re getting hit very hard by the Internet,” Diaz points out, adding that many of them have consolidated and are in the midst of downsizing their store base and their store prototypes. “There are fewer retailers to re-tenant a 50,000-sq.-ft. space versus a 10,000-sq.-ft. space and that’s the thing that makes power centers not as attractive.”

Lifestyle centers, meanwhile, make lenders “nervous,” Diaz contends. “Lenders like certainty, and lifestyle centers are so entertainment and fad-driven, and you never know what the next hot restaurant or specialty store is going to be,” she explains.

But “less attractive” assets aren’t doomed to be wallflowers at the mortgage dance, says Steeb. “Financing options remain available,” she says, “but borrowers need to be realistic as to what financing terms match the property metrics, and at what price… [they] still have many options, depending on their needs.”