While the impacts of COVID-19 on the retail industry have required lenders to adjust their underwriting guidelines, rates still remain at an all-time low ranging anywhere from 2% to 4%. Even as the pandemic continues to affect the global economy, it is evident that lender activity has continued to improve across a number of retail sectors over the past few months.
We are of the opinion that the outlook for the financing of retail properties will continue to move in a positive direction. The following is a breakdown by sector to gain a better understanding of the trends we’ve seen in lending.
Single Tenant Net Lease
The single tenant net lease product type has performed consistently well throughout the pandemic. Essential businesses such as drug stores, dollar stores, medical properties, and quick service restaurants (with drive-thrus) have remained financeable. While single tenant net lease has performed well despite the pandemic, there are sub-sectors that remain challenged. Examples of this would be small mom and pop businesses, casual dining, and fitness centers.
At the beginning of the pandemic, strip centers were generally viewed by lenders as too much of a risk. However, we have seen lender activity continue to increase over the past few months for this product type. With that said, lenders are typically requiring an occupancy level of around 85 to 90 percent in order to successfully transact on a deal. Ideally, lenders want the majority of the center’s tenants to be national or regional groups, and relatively “COVID-resistant.” If they are smaller local tenants, lenders will heavily rely on sales and financials. There is good reason to believe the current lending trends for this product type will remain consistent heading into 2021. However, solid distribution of a vaccine will most likely be needed in order to get activity back to the levels that we had seen pre-COVID.
Grocery Anchored Shopping Centers
Grocery-anchored shopping centers are viewed very similarly to strip centers. For lenders, they ideally prefer the majority of tenants to be national or regional groups, and relatively “COVID-resistant.” One of the challenges with this product type is that they typically demand a more expensive purchase price, which ultimately requires a lender that is able to provide a significant amount of money. Historically, CMBS and life insurance companies have been extremely active in this space. Now, both CMBS and insurance companies are relatively selective in what deals they are able to pursue. As a result, investors must rely on local lenders to provide financing for these transactions. Although options are available, there are only so many lenders in a given market that are able to take on loans in excess of $10 million.