Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)
Issue link: https://sct.epubxp.com/i/390025
the volume of deals driven by private purchasers surpassed the year before, says Real Capital Analytics. The big- ger players are being more selective, and many, including the real estate investment trusts, are selling off their 'B' properties, taking the opportu- nity of the healthy demand for retail to improve overall portfolio perfor- mance by sloughing off the lesser per- forming properties. One company that does not mind financing such 'B' property transac- tions is Prudential Mortgage Capital Co., though it depends on the spon- sor. "We have done these deals, but they are very specific to the borrower and the market," said Marcia Diaz, a Los Angeles–based managing direc- tor and the head of originations at the firm. "Generally, we are going to go with a strong operator, because you need to have the benefits of the operator's retail relationship." The terms are going to be more conserva- tive than they would be for a top-tier mall, Diaz says. When the higher-quality proper- ties do come on the market, competi- tion is fierce, which leads to a decline in cap rates. Real Capital Analytics data support this. Cap rates for malls hit 8 percent on average in 2010, and by the second quarter of this year, they had dropped to near 6 percent; strip center rates were 8.5 percent in 2010 and have since fallen to al- most 7 percent. And so while deals for good properties are getting more expensive, transactions are getting done because the capital is prevalent and the cost is cheap. CMBS remain the biggest source of capital for retail, followed by banks — the local, the regional and the too- big-to-fail. Deals financed by national banks hit 9.38 percent of the retail market last year, while regional and local banks financed 11.87 percent of retail deals, Real Capital Analytics says. Those numbers jumped this year to date, to 13.04 percent and 19.04 percent, respectively. "The national banks are lending everywhere, with a focus on CMBS loans, which are mar- ketable to institutional investors," Thypin said. "The local banks don't have conduit operations, so they are making balance-sheet loans, and they are best-positioned to compete for those loans in markets where CMBS is unwilling to go." Big developers and shopping cen- ter owners can play bank participation in numerous ways. Phillips Edison has executed a $350 million line of credit led by Bank of America, Citigroup and KeyBank as lead managers. "When we are acquiring assets, we are either buy- ing them all-equity or drawing on our line of credit," said Phillips Edison CFO Devin Murphy. "We are not look- ing to CMBS financing. To tap CMBS, the cost of capital would be about 4 per- cent. We can draw our line of credit at LIBOR plus 130 basis points — that's about 250 basis points inside of CMBS. For us CMBS is expensive." Phillips Edison acquired a 1.2 million-square-foot mall in Parma, Ohio, near Cleveland, including de- velopment and redevelopment com- ponents. "We were able to acquire Parma at a significant discount and favorable basis due to the complex nature of the asset, large size and mar- ket," said Ryan Moore, vice president of capital markets at Phillips Edison. "Given our track record through eco- nomic cycles and deep relationships with the lending community, lenders have been willing to aggressively lend and partner with us on these types of transactions." P h i l l i p s E d i s o n s e e k s t o b o r - row in the investment-grade, unse- cured bank market, says Murphy. "We think that gives us the greatest amount of flexibility and the cheapest cost of capital," he said. So far this year the volume of insurance company capital for re- tail deals is running way behind the volume for all of last year. Insurer- financed deals totaled 15.8 percent of the market last year, but as of midyear 2014 the total was just 6.6 percent, according to Real Capital Analytics. "One of the reasons why insurers were so high in previous years was that they did a lot regional mall busi- ness, and those were very large loans," Diaz said. "Those deals aren't getting done on a secured basis much any- more. The retail REITs are moving into the unsecured markets just be- cause pricing is better." Or this could be considered a har- binger of the poorer quality of trans- action in the marketplace, because insurers like the good stuff, although Sandy Sigal, CEO of NewMark Mer- rill Cos., says his company has been using insurer dollars for special situa- tion, nontraditional deals. Apparently, even the insurers are going out on the risk curve to get deals done. NewMark Merrill has been more seller than buyer of shopping centers because the pricing has been "crazy dollars," especially with the CMBS investors who seem to have unlimited capital, says Sigal. "They have money and want to spend it," he said. On a straightforward deal, the life 44 S C T / O c t O b e r 2 0 1 4 Cap rates for malls hit 8 percent on average in 2010, and by the second quarter of this year, they had dropped to near 6 percent.