M&M: Lenders’ ‘Disciplined’ Approach on Retail Properties

Lenders are following a “disciplined” approach when it comes to retail properties while investors account for higher borrowing costs, said Marcus & Millichap, Calabasas, Calif.

“Following an increase in the yield on the 10-year U.S. Treasury, investors have adapted their underwriting models to reflect a rising interest rate environment,” Marcus & Millichap’s Retail Investment Forecast said. “Debt markets remain liquid, providing solutions and sources for a range of capital needs.”

The report said acquisition loan leverage reflects “disciplined” lender underwriting, with loan-to-value ratios typically ranging from 55 percent to 65 percent for most retail properties. Higher interest rates and conservative lender underwriting slowed deal flow starting in late 2016, a trend that will likely continue, M&M said.

In addition, lenders continue to scrutinize properties’ exposure to underperforming chains–last week Sears Holdings announced “substantial doubt” that it can survive–and their “vulnerability” to the growth of e-commerce this year, the report said.

“Banks stepped in to capture greater market share last year as commercial mortgage-backed securities issuance eased in response to new risk-retention standards under the Dodd-Frank law,” Marcus & Millichap said. Since December 24, CMBS issuers have been required to retain 5 percent of every new deal issued or find a B-piece buyer willing to take on that risk.

The report noted that the first CMBS offerings issued under the new guidelines went to market late last year. “The securitizations were well received by the bond market,” M&M said. “The prospects of major changes to the Dodd-Frank Act could materially change CMBS standards this year, but revisions will likely emerge slowly. In this environment, banks are expected to pose competition for CMBS lenders, offering a range of maturities for relatively low-leverage loans.”

But a potential easing of regulations on financial institutions could “liberate” additional lending capacity and higher interest rates may also encourage additional lenders to participate, the report noted.