Retail real estate borrowers with loans maturing, even some who had refinancing committed, saw lenders’ doors slam shut last year. “You didn’t know what tenants were going to survive, flourish or have to move out, and you didn’t know which ones were going to be able to pay rent or need some assistance,” said NorthMarq Dallas managing director and senior vice president of debt and equity Ron Reese. Now lenders are returning to the market.

Financing for all but best-in-class, grocery-anchored centers and credit tenant, net lease properties froze for a good three to four months last year. “The retail deals we were transacting on we couldn’t close because we couldn’t deliver estoppels that said tenants were paying rent, and tenants didn’t know what their future looked like,” said Reese. However, the market began to thaw late in the third quarter, and more lenders are continuing to trickle back.

Instead of a hard “no” for retail loans, lenders, from banks and life companies to debt funds, are saying “maybe,” willing to take a look at retail refinancing deals. “We’ve seen a pretty tight correlation between loosening COVID-19 restrictions and opening back up of properties and more lenders that are entering the marketplace and interested in financing these retail deals,” said SRS Real Estate Partners vice president of debt and equity Ben Townsend.

And lenders are finding plenty of pent-up demand from borrowers. The pandemic didn’t stop the clock on loan maturities. At the same time, a variety of scenarios continue to fuel new demand for refinancing. For example, an owner might need to buy out a partner, need to pull equity out of a property rather than sell it or simply want to take advantage of still-favorable interest rates.

Retail can yield better rates for lenders

Retail is becoming more palatable for lenders, which are gaining confidence in the recovery. At the same time, lenders looking for yield can get a premium rate on some retail loans compared with more-competitive multifamily and industrial properties. Retail lenders generally expect a premium of 25 to 50 basis points, depending on the individual deal, notes Reese.

The 10-year Treasury has moved about 75 basis points higher this year, the economy has strengthened and some anticipate higher inflation. As of the end of March, the 10-year Treasury was hovering at about 1.75 percent. However, market competition has caused spread compression, so the all-in rate has not increased at the same level. What that means for borrowers is that they still can find some attractive financing rates.

Many lenders also have created rate floors on the base rate at around 2 percent and then added their spread on top of that, so there is still room for the 10-year Treasury to tick up to 2 percent or slightly higher without affecting rates too much, notes SRS vice president of debt and equity Matt Marlin. “Most deals that are financeable today are going to be sub-4 percent unless there is a special purpose or a vacancy or value-add factor,” he said.

For example, SRS is working on a 10-year fixed loan for a non-anchored shopping center in Arizona at 65 percent loan to value. The loan, which has a 30-year amortization and five years of interest only, has priced at 3.7 percent. The property has some good credit tenants, including a Walgreens and a Chase, which is giving the commercial mortgage-backed securities lender confidence to do the deal. Borrowers also are finding success with local lenders that have a good understanding of the market and location, adds Marlin.

Lenders remain selective, though

Last year, some mortgage brokers advised retail clients that if they were able to get a single quote, they might as well take it rather than wait for the next one — because there might not be a next one. “Now, we are seeing the number of lenders providing quotes increase across all property types,” said JLL Capital Markets Pittsburgh managing director Claudia Steeb. That being said, it does take longer to get a retail deal through a lender’s process to secure the approvals needed to issue term sheets. “We are seeing many more lenders express interest in providing debt for retail properties,” said Steeb. “However, refi remains a little more difficult than an acquisition because an acquisition has fresh cash going in.” Pulling equity out of properties also can be challenging, especially if there is vacancy to fill or other work that needs to be done, she adds.

Lenders tend to favor essential and e-commerce-resistant retail, from banks and hair salons to liquor stores and fast food. “Grocery-anchored retail has always been a darling, and we’re getting some very competitive rates for those assets,” said Steeb. In some cases, grocery-anchored centers are seeing loan rates that have dipped below 3 percent, she adds. However, lender appetite for retail loans is expanding beyond that category, as well. The JLL Capital Markets retail debt placement teams closed $542.8 million in retail financings between July 1 and Nov. 30. Grocery-anchored retail represented 12 of the 29 loans, while the remaining 17 were a mix of non-grocery-anchored, shadow-anchored retail, retail condominiums and single-tenant assets.

Lenders are selective in the loans they are willing to finance, and every lender is a little different in their preferences in terms of property type, geographic market, types of tenants, leverage and  other factors. Everyone knows that retail real estate has been challenged during COVID-19, and lenders are being cautious in their underwriting and diligence, diving deep into the numbers to make sure they are underwriting at a net operating income that is going to be sustainable going forward, notes Steeb. They also want to work with borrowers who have a commitment to the asset, which generally means a strong equity stake, she says.

Reese adds that lenders want to know how tenants were impacted by COVID-19 shutdowns. What was the level of rent collections, and how did the center itself perform? What did sales look like then and now? Did the borrower request any debt-service relief or a change to interest-only payments in the past year? He said, “If there are positive answers to those questions of 2020 survival, then lenders will definitely look at those deals.”