Nationally, retail vacancies are expected to reach 9% by year’s end, but there is wide disparity between high-barrier-to-entry coastal markets and many inland markets. E-commerce is having an impact across the board, as more consumers buy online rather than visit bricks-and-mortar.
The bricks-and-mortar product is changing, too—many traditional enclosed malls are struggling or have closed, and no one is building them anymore. Yet, they may be ripe for conversion to alternative uses and, either way, provide opportunities for savvy investors. Highest investor demand is focused on trendy lifestyle centers on the one hand, and outlet centers on the other. Industry sources estimate that almost 20 million square feet of outlet construction is currently planned or underway nationally.
Community strips are evolving as well. Nontraditional users, such as medical and dental clinics, hospital outpatient centers and personal care providers are filling vacancies. Savvy owners and investors continue to find alternative users when struggling mom-and-pop and franchised retailers shutter.
Favorable spreads vis-à-vis the bond market and low interest rates are driving investment in retail, but funding can be scant for “problem” properties. But “problems” provide opportunities for those with a solid understanding of retail market dynamics and the potential for alternative uses, especially in riskier secondary and tertiary markets.
For example, when a 11-store shopping center in a tertiary market in Oklahoma lost its big-box anchor and was reduced to 15% occupancy, the owner was still able to obtain direct private funding based on the property’s net operating income and appraised value. With this financing in hand, the owner was able to negotiate with his bank to buy his note at a reduced price, at a better price point, and ultimately sign a new anchor. Direct lenders aren’t necessarily looking at occupancy rates.
In another example, a local grocer anchoring a center in a secondary market in Indiana obtained much higher loan-to-value direct financing worth 80% of what the bank was selling the property for, based on the property’s actual value. Most banks have issues with an anchor buying the property if that anchor is not an “A” tenant. But private direct lenders like Kennedy Funding are prepared to take advantage of opportunities and go where banks fear to tread.
Retail remains desirable, but getting funding in many markets is difficult. That’s where the hard money – a private lender such as Kennedy Funding – enters the picture, poised and equipped to help turn someone’s “problem” into someone else’s golden opportunity.