by Jared Repka
Bison Financial Group principal, David Repka, was recently interviewed by a national commercial real estate publication to discuss his views on where the retail lending market is headed in 2023....
Q: Currently and/or looking ahead, what are some of the highly sought after property types/tenants in your region?
A: Shopping Centers anchored by market-leading grocery stores (Publix, Kroger, Wegmans, etc.) and/or strong big-box, necessity based retailers (Walmart, Target, Home Depot, etc.) will be in demand by investors. 1031 Exchange investors especially like Freestanding Single Tenant Net Leased Assets with strong, investment-grade tenants and tough to disintermediate business models (e.g. Amazon has not figured out how to deliver gasoline by drone so market leading gas/c-stores such as Wawa, Circle K, and 7-Eleven will thrive). Investors will continue to purchase properties leased to Quick-Service Restaurants such as McDonald’s, Chick-fil-A, Chipotle, and Yum! Brands (Taco Bell, KFC, and Pizza Hut). New restaurant concepts with multiple drive-thrus are seeing strong same-store sales growth.
Q: What are lenders looking for?
A: Flight to quality. Lenders will seek opportunities to make lower leverage, high debt yield/debt coverage loans on properties in best-in-breed locations that will stay rented in boom or bust times with best-in-class sponsors. Properties that don’t make the cut will be forced to do deals with debt funds, hard money lenders and Loan-to-Own shops underwriting to a “go dark” or discounted land value.
Q: Is the retail market hot in your region?
A: I live in Florida. Over 1,000 people a day are moving here with many multiples of that figure visiting for a long weekend or for an entire season. During the pandemic when much of the country shut down, the political powers in Tallahassee kept Florida open for business and encouraged people to visit Florida.
Q: What are the growth trends and demographics being sought after?
A: The twin forces of the Internet and the Global Pandemic have changed retail forever. It is astonishingly easy to order goods or food on line and have it delivered for free or a nominal cost. Business models that can’t easily be disintermediated will continue to grow. Retailers that can be disintermediated or that lack a differentiator will join Ames, Blockbuster, Borders, Circuit City, and Tower Records as a distant memory.
Q: What would be required for new properties? Existing properties?
A: Lenders are hyper-focused on the quality and durability of the cash flow. Lenders are asking many more questions before sharing a term sheet. Typical underwriting questions include: What leases will expire during the primary term of the loan? How do the market rents of this property compare to the competitive set? What are the odds of replacing a tenant and what are the rental rates in a “go dark” scenario? What is the Net Worth, Schedule of Real Estate Owned and Global Cash Flow of the borrower? Does the borrower own like/kind properties? Are they an expert in this asset type? What skeletons are in their closet?
Q: What properties will be in the best position to have the most lending options in your market?
A: There will be a continued flight to credit quality and to “necessity retail” (grocery, pharmacy, gas, and home improvement). Lenders are seeking loans from best-in-class Sponsors that have survived multiple market cycles and have a reputation for managing and mitigating risk.
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