Cash-rich commercial property investors could have a rare opportunity to snap up retail properties with value-add potential as tightening lending standards restrict rival buyers whose balance sheets are more debt-laden.

It’s getting more expensive to borrow money to buy or refinance commercial properties, according to CBRE’s U.S. Cap Rate Survey H1 2022, which surveyed 214 commercial property executives across 50 markets. Higher interest rates mean significantly higher borrowing costs, reducing the potential buyers’ pool for properties on the market. In some cases, debt financing costs have surpassed market capitalization rates, making deals totally unfeasible, respondents told CBRE. They expect the trend to increase in the second half of 2022.

Besides higher borrowing costs, most respondents expect less accommodating lending terms over the next six months. Lender concerns about potential value erosion amid worsening economic conditions prompted many of them to lower loan-to-value ratios and raise debt service coverage ratios, respondents said. Respondents overwhelmingly anticipate less accommodative financing for riskier strategies like value-add deals, in which buyers expect to be able to boost rents after making improvements.

Retail properties now look more potentially profitable than industrial and multifamily stock, which are both popular and expensive, according to CBRE global client strategist Spencer Levy. CBRE estimates retail cap rates were flat to trending downward during the first half of 2022. The cap rate is the ratio of net operating income to the acquisition price of the asset. Generally speaking, the lower the cap rate, the less profitable the deal is for the buyer.

“Retail cap rates will likely see some upward movement” in the second half of 2022, Levy predicted. He said investors think lower-tier retail properties with the potential to charge higher rents will attract more investment in the second half of 2022.