Shopping Centers Today

MAR 2017

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

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Page 37 of 59

38 S C T / M A R C H 2 0 1 7 well, says Richard Wagman, the managing partner of New York City–based Madison Capital. "We're finding continued strength in the debt and equity markets for well-located assets that are close to [public] transportation, with sound business plans and opportunities for long-term value enhancement," Wagman said. The private investor market is "relatively healthy" in the $15 million to $25 million loan range, observes JLL's Board, "but it gets a lot tougher at around $50 million." As a rule, equity investors are more skittish about add- ing square footage to an already over-retailed landscape than are debt investors, unless a project is extraordinary, says re- tail investment consultant Jan Rogers Kniffen, CEO of J Rog- ers Kniffen WWE. "CoStar Portfolio Strategy says that retail square feet per capita peaked in 2009 at about 48 square feet per capita, and despite all the closings of stores announced since then, we still had 47 square feet per capita last year." Meanwhile, the second half of 2016 saw fewer shopping center sales than the first half, as retail REITs began tempering acquisitions. Non-REIT investors are starting to fill that breach this year, particularly when quality open-air urban assets are involved, Wagman says. Despite several high-profile closings, he says, retail tenants are still actively pursuing select growth locations in Chicago, Miami, New York City and other sites "where the urban demographics and medium-term trends remain compelling for acquisition and development." CMBS lending slowed last year owing to global volatil- ity and federal risk-retention rules that went into effect in December. Just $62.7 billion in CMBS loans were issued in 2016, down from $95.1 billion in 2015, according to Morn- ingstar. Both Morningstar and Standard & Poor's are project- ing some $65 billion in CMBS issuance for this year, while a more optimistic Fitch Ratings is projecting $75 billion. As shopping centers and other commercial borrowers face a so-called "wall of maturities" this year from the $230 billion in CMBS issues of 2007, done mostly on 10-year terms, good industry fundamentals are negating some of the predicted woes, according to David C. Palmer, executive vice president of development at the Dallas-based Weitzman Group. "That's how you get out of a [challenging] loan: Get the value up on your property," he said. "Rents and values have recovered to a point that most centers can be refinanced." Other CMBS borrowers are turning to an assortment of private-equity money and bridge lending to fill the gap, says Board. Developers with a long-term horizon tend to pick like- minded life insurers or other institutional lenders out of the lending pack, he says. With the rise of restaurants and food halls as key tenants, financiers are viewing open-air centers as a little less risky today, he points out, because a landlord's down time for replacing a restaurant is significantly shorter than it is for replacing a conventional retail tenant. "If you lose one restaurant, there's always one out there waiting to backfill it," Board said. Over the past few years, a growing pool of local and regional fast-casual restaurant chains has offset a slight decrease of national retail tenants, he says. Developers in most of the smaller U.S. metro areas still must scramble to make deals happen, and this often means tapping city coffers. "In secondary and tertiary markets, public-private partnerships have become the new normal for retail develop- ment," said Lacy Beasley, president and COO of Birmingham, Ala.–based consulting firm Retail Strategies. Municipalities and developers have become more adept at structuring incentives to balance the risk between them while also protecting the proj- ect, she says. Because development costs have risen faster than retail rents, cities are becoming more amenable to plowing the shopping centers' sales-tax proceeds back into the properties for some years to make them more affordable to create, says Beasley. Unlike a decade ago, flawless national credit is no longer the primary loan determinant for many retail center tenants — revenue is, says Scott Kaplan, executive vice president for re- tail brokerage at JLL. "You might have a local grocer with eight stores in a trade area that is doing a million bucks in sales a week and say, 'Okay, we'll fund that.'" Despite issues with some of the big department-store boxes, such as Macy's or J.C. Penney and their store closures, notes Board, "we continue to see resilience of point-of-sale re- tail. Shopping centers continue to show resilience in how to differentiate themselves to survive." Indeed, Palmer seems to round out the upbeat chorus. "In the whole of the retail sector, there is now a nice balance be- tween lenders and development," Palmer said. "Construction money is cheap, permanent money is cheap, and cap rates remain at record lows." n "There is now a nice balance between lenders and development. Construction money is cheap, permanent money is cheap, and cap rates remain at record lows"

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