Smaller property owners and investors often tout their size as an advantage. They can be nimble, moving quickly to adapt to market trends and make decisions. In the current market, the big question is whether they have the credit and access to debt that are necessary to get deals done.

For Corsair Property Co., the answer is definitely yes. The firm has been on a steady growth path since it was founded five years ago, acquiring seven shopping centers spanning some 500,000 square feet in Texas. But while Corsair sees a robust pipeline of investment opportunities ahead, it also is working harder to put deals together in a more difficult finance climate.

“The higher interest rates are absolutely making underwriting more challenging,” said Corsair president and founder Will Wilson. “We’re having to be a lot more cautious on the types of deals we’re spending time on.” The company acquires cash-flowing retail properties that have value-add components, either capital improvement or lifting rents that are below market. So far, the firm has been agnostic on the type of centers it pursues, buying grocery- and nongrocery-anchored centers. Most recently, it acquired its first power center, Irving Market Center.

Although Corsair was able to assume an existing commercial mortgage-backed securities loan on the purchase, the firm primarily is relying on its existing relationships with regional bank lenders. According to Wilson, regional bank lenders are willing to quote deals, though there is definitely a sense of extra scrutiny and caution. “We pride ourselves tremendously on the relationships we have with a small select group of regional lenders, and I think that is a big part of how we’re going to be able to transaction in 2023 in a difficult environment,” he added.

Dust Settles on Bank Sector Shocks

Borrowers across the board are adapting to higher financing rates and the lingering aftereffects of the failure of Silicon Valley and Signature banks this year. “The borrowing environment for small and midsize borrowers has changed considerably compared to 12 months ago,” said Marcus & Millichap Capital Corp. executive vice president and head of business Evan Denner.

The rapid increase in interest rates over the past year has resulted in tighter underwriting and a reduction in new loans being originated from local and regional banks and credit unions, which traditionally have served as the primary source of financing for small and midsize owners and investors. That trend was further exacerbated by the collapse of Silicon Valley and Signature banks, by strain on bank liquidity as deposits moved to higher-yielding sources and by general concern about the economy. “Despite these issues, we continue to see capital available for the right transactions but at conservative lending levels with borrowers who are well capitalized,” said Denner.

The reality of higher rates is resulting in lower leverage from lenders. “We have yet to reach a point of equilibrium where cap rates, lending rates and leverage are working seamlessly,” said Denner. Many lenders have maintained wide spreads for now, effectively putting a cap on the amount of new loans that can move through the system and close. “They are still open for business theoretically, but practically speaking, the volume of transactions has slowed as a result and cap rates have not widened sufficiently to make it compelling for lenders or investors to come back into the market, particularly against the backdrop of an uncertain economy,” he added.

Although liquidity is tighter, the good news is that there is financing available for retail properties. There were periods coming out of the Global Financial Crisis and during COVID that had a lot of uncertainty around the viability of retail, noted Eastern Union co-founder and president Abraham Bergman. “Nobody wanted to touch retail because they were nervous about Amazon and whether retail could survive, but retail did survive and it’s doing great.” Lenders are being cautious and are underwriting very carefully, but they do want to do business, he added.

Casting a Wider Net

While there is still capital and willingness to finance retail properties, borrowers are navigating a choppy market. “You do have to cast a wider net to get a better idea of where the market is at for each particular deal,” said Ryan Morris, a vice president at Bellwether Enterprise Real Estate Capital LLC, a national commercial and multifamily mortgage banking company. It’s important for borrowers to understand where that capital is coming from and t what happens if markets move while the loan is closing or how the rate might move if the borrower doesn’t rate lock, he added.

For example, BWE recently secured a $6.25 million loan to help finance the acquisition of Shoppes at Brookfield Commons, a 42,356-square-foot strip center in suburban Milwaukee. BWE originated the loan from Ameritas Investment Partners, an investment adviser representing insurance companies. The nonrecourse loan has a three-year term, a fixed rate and $1 million of future funding for capital improvements and accretive leasing. At closing, the property was only 54% leased, and the loan provides the borrower ample time and capital to attract tenants and lease up the property to stabilization.

Whereas banks are being more selective or lending only to existing relationships, life insurance companies still actively are providing longer-term, fixed-rate financing. Some smaller life companies will do smaller-balance loans, some as small as $1 million. “Those balance sheet lenders still have capital to put out, so overall, the liquidity is still there for strong, well-located retail assets,” said Morris.

Shifting Field of Lenders

According to Bergman, one of the biggest challenges in navigating the current market is just knowing who’s actively lending. Maybe a lender was active in the first quarter and now wants to slow originations to see how that loan portfolio is doing. On the opposite side, maybe a lender that was on the sidelines in the first quarter has seen loans roll off its balance sheet and now is looking to put out more capital. Mortgage brokers are spending more time trying to figure out which lenders are willing to do deals today, he said.

Banks across the board are reserving capital for existing customers. “It’s much harder to find financing from a bank you don’t have a relationship with,” said Bank of Tampa senior vice president and commercial real estate director Rachael Brown. Banks don’t want to say no to a client because they said yes to someone off the street, she added. Exposure also is a big component for small and midsize banks. Furthermore, banks of all sizes are making blanket statements that they’re not lending on certain segments within retail, such as big-box or unanchored, depending on the banks’ credit philosophies and what they already have in their loan portfolio, she added.

In addition, the willingness of lenders to provide capital depends highly on the credit quality of the borrower, the type of property and the geographic location. Grocery-anchored retail remains a favorite, whereas lenders are wary of risks associated with urban locations in major metros due to the negative impact hybrid work has had on the daytime population. Smaller, local owners with unanchored retail are going to find fewer lender choices, but debt is still available, noted Brown.

Bracing for Tighter Underwriting

Lenders are understandably cautious. As always, they’re looking closely at properties’ tenant mixes, rent rolls and credit quality of tenants. However, their primary focus is on in-place cash flow. Assets that don’t have in-place income are difficult to finance, and such cases often result in tough conversations with clients, said Bergman. Does the owner really need to refinance now, and if so, can it come up with additional equity to secure a new loan? “If you need a lot of exceptions and twisting to get it to fit into the box, this is not the market to get that done,” he said. “So for those borrowers, it may be better to wait if they are able to do so.”

A common theme is a more granular focus on the rent roll and making sure there isn’t too much concentration on one tenant. The lender wants to know that if that tenant were to exit, the property would be able to continue to cash flow and cover debt service coverage payments, noted Morris. Overall, access to capital is somewhat dislocated depending on the source of capital. BWE has had a number of calls in recent weeks from clients whose banks are passing on loan renewals or are providing terms that aren’t competitive with the rest of the market. The end result is that borrowers may need to search a little harder to find the best available capital source, he said.

The pool of lenders has shrunk as certain banks and credit unions either have moved to the sidelines or have curtailed lending activity by way of tightening underwriting. CMBS lenders actively are quoting loans, but the cost of capital is a factor, particularly for a borrower looking to lock in a loan for 10 years, according to Denner. Some life companies are willing to lend on small and midsize transactions.

Although many borrowers are trying to leverage existing lender relationships, many find that their traditional lending sources are not available to them, added Denner. Some borrowers are forced to go into the market to identify new sources of capital and establish new lending relationships. “This is where it’s important to run a thorough process with an experienced adviser to make sure you are obtaining the most efficient available capital, which in most cases is not coming from your relationship bank today,” he said.