Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)
Issue link: https://sct.epubxp.com/i/528948
rates are going up and that is because the economy is stronger, then retailers do well. Retailer sales will improve, and rents will increase over time." Jim Costello, a senior vice presi- dent at Real Capital Analytics makes a similar point. "When interest rates increase, that is a sign of growth in the economy," he said. "The rise comes because there is a demand for capital, which is needed for growth and invest- ing." Theoretically, if someone has an ownership in a large portfolio with very little debt, a rise in interest rates is unlikely to matter very much, he says. REITs generally fit that bill, but they still could face share-price issues in a rising rate environment. Phillips Edison and Donahue Schriber are among the companies ad- justing to the prospect of an interest- rate increase. "On the construction side, in deals that we are doing right now, we are going for two-year loans with two one-year options," said Phil- lips. "We are shortening the time on the short-term, floating-rate debt, and then, about a year after we have com- pleted a new property or bought an existing one, we will look to fix longer- term debt through either the CMBS or insurance market." By comparison, Phillips recalls that about 15 years ago, his company was doing three-year floating-rate loans on construction or acquisition with two one-year options. "We are shortening the old formula, the five-year horizon, because we think interest rates will increase over the next five years," he said. Donahue Schriber is building a 900,000-square-foot power center in the northeast suburbs of Sacramento, Calif., and also using short-term, floating-rate debt. "We have always had a certain portion of our over- all debt in short-term," Casey said. "That's because we have the luxury of a large portfolio-wide structure that is being held for the long-term. A single property developer has a much greater interest-rate risk. For us the overall portfolio of the company is weighted toward fixed-rate because of lower interest-rate-volatility risk, but we keep some of it in floating-rate because the interest rate is the best we've ever seen." Construction-loan risk can easily be minimized today, says JLL's Cooper. "A lot of developers work a deal where the construction loan automatically swings into a semi or permanent loan," Coo- per said. "Today if you haven't got that construction or semipermanent loan worked out, you will have interest-rate risk at the end of your construction cy- cle. The interest rate in two years won't be the same as it today; it will be higher, and your yield will be lower." The same consideration is true for owners with excess assets in their port- folios. If a shopping center is well occu- pied and the owner has debt maturities coming due in the next couple of years, now is a great time to sell, thanks to low cap rates and potentially higher interest costs in the future, says CBRE's Bratt. "Although it is difficult to pick the right time to sell, values today are 10 percent to 15 percent above 2007 values," Bratt said. "Owners may look back at this pe- riod in two years and wonder why they did not sell more." SCT 40 S C T / J u l y 2 0 1 5 Since the depths of the recession, in 2009, issuance of commercial- mortgage-backed securities has climbed ever higher annually. In 2014 CMBS issuance reached $90 billion, and things look even better for 2015. By mid-April, CMBS issuance had totaled $36.9 billion, compared with $21.4 billion in the comparable period last year, according to Sean Barrie, a research analyst at Trepp, in New York City. What is interesting about the CMBS market is that a tsunami of CMBS loans will be maturing in 2016 and 2017: $120 billion and $124 bil- lion worth, respectively. These are the biggest numbers ever, says Barrie. Investors are looking ahead and real- izing that the landscape will change when their loans hit maturity. Interest rates will be different, and the market may not be as salubrious as now. As a result, a lot of borrowers are refinancing loans, even though there may be a pre- payment penalty. One of the more popu- lar trends for borrowers looking to pay off loans in lockout is defeasance — "when the borrower substitutes new col- lateral for the loan in the form of Trea- sury securities that replicated the loan's cash flows," said Barrie. "You would be shocked at how many people don't have what they think they have in terms of a prepayment penalty," said Adam Petriella, executive vice president for capital markets at Coldwell Banker Commercial, in New York City. "Sometimes the penalty is not as bad as they thought, and they realize if they were going to keep the asset another 10 years, it would be worth it to refinance and prepay." On the other hand, "if someone has an onerous prepay and the loan is com- ing due in 36 months," Petriella said, "there will be a higher interest-rate environment, and there is not much the borrower can do about it." — SB A RUSH TO REFINANCE "When interest rates increase, that is a sign of growth in the economy. The rise comes because there is a demand for capital, which is needed for growth."