Shopping Centers Today

JUL 2014

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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up significantly, reports Dan Fasulo, a managing director at New York City–based Real Capital Analyt- ics. Those segments would include commercial-mortgage-backed securities, banks, financial companies and insurers. The retail sector recorded a tremendous first quarter this year, with sales volume at $22.9 billion, more than double the year- ago volume, according to Real Capital Analytics. Sales of individual properties totaled some $11 billion, up 70 percent year on year, while portfolio transactions hit $2.5 billion, up 43 percent. Real Capital Analytics' buoyant numbers are interesting, because individual lenders ex- pressed unhappiness with first-quarter ac- tivity, perhaps an indication that the com- petition has gotten wide and aggressive. Commercial real estate finance firm Walker & Dunlop works with numer- ous life insurers on the retail side of the market and has its own commercial- mortgage-backed-securities conduit. The firm has financed a lot of grocery- anchored retail deals over the past few years. "We are seeing all of our lenders looking to grow their portfolios," said Harrington. "There just haven't been as many sales recently, as sellers become a little more cautious due to lack of inven- tory to trade into." Refinancing deals have slowed too, because lenders were so aggressive last year that loans coming due this year got refinanced a year early. Commercial- mortgage-backed securities have made a comeback and accounted for 47 per- cent and 45 percent of the retail prop- erty lending market in 2012 and 2013, respectively, though even here, there is dissatisfaction. The signals for CMBS are mixed, says Joe McBride, a CMBS research analyst at New York City–based Trepp. "Last year the CMBS market was red hot," said McBride. "This year we were expecting that trend to continue, but we have come out in 2013 a little slower." The CMBS market's total issu- ance hit $83 billion last year, and expec- tations were that the market could reach $100 billion this year. That has not hap- pened. "We are well below that pace at the moment," said McBride. "At the start of the second quarter, the CMBS market hit $20 billion, the same pace as 2013." CMBS had always been highly concentrated in retail. Retail alone ac- counted for 30 percent of the $24.7 bil- lion in total CMBS issuance last year, McBride says. That is considered typical. Harrington tells of a CMBS refinanc- ing he is working on for a shopping center in Payson, Ariz. "The market up there is over 90 percent occupancy, but this center was closer to 83 percent," he said. The center had a grocer that fell into and then climbed out of bank- ruptcy, but Walker & Dunlop was able to provide 75 percent loan-to-value, nonrecourse financing with an interest rate in the high 4 percent range and a cap rate between 8 and 8.25 percent. CMBS lenders have been more willing to go out to secondary and tertiary mar- kets, observes McBride. Although actively pursuing new acquisitions, Olshan has found the market for retail acquisitions extremely challenging. As an owner-operator, Ol- shan is able to focus on investments in new and existing assets, and after a cycle of reinvesting in its own portfolio, the company completed numerous refi- nancing deals over the past two years. "With the structure of bank balance sheets, it is difficult for them to do a 10- year, fixed-rate financing, because the low-yield environment is not an efficient use of their balance sheet," Bornstein said. "If you want to have longer-term, fixed-rate financing, the senior lending market is really limited to insurance companies and CMBS. The big differ- ence is, insurance companies aren't as aggressive when it comes to total capital structure, as they will lend only 55 per- cent to 60 percent of value — whereas CMBS will do 70 percent." Olshan refinanced The Greene, a 1.1 million- square-foot, mixed-use property in Day- ton, Ohio, with CMBS and a mezzanine component. "This was a construction loan that needed to be refinanced, so it was higher leverage than we would nor- mally have taken," Bornstein said. His observation about the banking sector notwithstanding, the regional and lo- cal banks have accelerated lending and improved issuance market share to 13 percent of last year's lending activity in retail, from 9 percent the year before, reports Real Capital Analytics. "Banks are definitely aggressive on the value-add opportunities, albeit with typically some form of recourse," said Harrington. Over the past few years, a number of nonfinancial entities have entered the market, including corporate entities, hedge funds and REITs. Finally, insurers have been very interested, being particu- larly hungry for grocery-anchored retail, and they are large enough to finance regional mall deals. Total origination volume for life insurers rose last year, but insurers lost market share nonethe- less, because everyone else was so aggres- sive. Life insurers generally go after the best deals, which is one reason they have dominated retail financings in the major metro areas, with a 22 percent share. As for CMBS, McBride is upbeat. Slightly. "Last year we were at $83 billion in issuance," said McBride, "and we are going to beat that, but not by much — maybe $85 billion to $90 billion in 2014." SCT 40 S C T / J u l y 2 0 1 4 Although actively pursuing new acquisitions, Olshan Properties has found the market for retail properties extremely challenging. 38-40_SCT_JUL14_Lenders.indd 40 6/12/14 5:57 PM

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