LADERA RANCH, CA—Lenders are beginning to lower the maximum loan-to-value and increase debt-service-coverage ratios, keeping rental-rates flat and allowing landlords to reserve for tenant improvements in case a property needs to be repositioned during the term of the loan, Money360’s president Gary Bechtel tells The technology-enabled direct lender specializing in commercial real estate loans closed more than $100 million in loans in Q3, bringing the company’s total loan closings to over $450 million, with a target of $600 million in transactions by year-end.

We spoke with Bechtel about the lending market for retail in particular, which is undergoing a reinvention. How would you characterize the lending market for retail at this time?

Bechtel: Still robust, but constrained. A number of traditional lending sources have cut back on the amount and type of retail that they are comfortable lending on, primarily due to regulatory or portfolio constraints. We are seeing more focus on smaller retail properties (non-big-box-anchored centers) given the contraction in some of the category killers such as Sears, JCPenny, Macy’s, Kohls and Toy-R-Us. Many lenders are focused on providing financing for larger strip centers, grocery-anchored centers and centers in infill areas. Centers with marginal tenant bases, especially those located in secondary or tertiary markets, will most likely be financed on a more conservative basis and/or by the emerging group of non-bank lenders. How do you see lenders’ views on this market changing as we move out of this cycle and into the next?

Bechtel: As is already occurring, lenders are beginning to underwrite these transactions on a more conservative basis, either lowering the maximum loan-to-value (LTV), increasing the debt service coverage ratios (DSCR), keeping rental rates flat in the stress analysis and potentially reserving for tenant improvements in the event that the property needs to be repositioned during the term of the loan. Many retail centers today, especially regional-mall properties, are demolishing or repurposing their anchor stores for alternative uses as those tenants vacate or go bankrupt. Which geographical areas are faring better with retail lending?

Bechtel: Core markets, such as Los Angeles, New York, Dallas, San Francisco, Atlanta, etc., or those markets that are experiencing population and income growth. Many markets in the West are still very strong, as are markets in Texas, Tennessee, North Carolina, to name a few. The key to maintaining the environment for retail lending is strong employment and income growth. What else should our readers know about the retail lending arena?

Bechtel: Amazon and online-retail shopping is influencing retail lending, but the bulk of purchases are still made in-store. People may buy online, but they still want the “experience” of touching the product and the atmosphere of a retail environment. That’s why, I believe, many shopping centers are transitioning to “lifestyle” centers, blending the shopping, dining and entertainment experience at one location. Amazon can’t provide this—at least not yet.

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