Shopping Center Business

MAY 2017

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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FINANCE 162 • SHOPPING CENTER BUSINESS • May 2017 N o real estate sector is experienc- ing a bigger tectonic shift than retail. Office, multifamily and in- dustrial have not escaped market tremors brought on by shifts in macroeconomic trends, but retail is alone in experiencing a fundamental change in its permanent landscape. While the shift from brick-and- mortar locations to e-commerce retail has been discussed ad nauseam, from a lend- er's perspective, we are recently seeing the full force of this phenomenon's impact on retail destinations. As e-commerce has grown to become an indispensable part of many consumers' everyday lives, evolving buying habits are changing the viability of physical retail developments. Recently, grocery chains such as Fresh & Easy and sports retailers such as Sports Authority and Sport Chalet have been closing at rapid rates. Big box depart- ment stores, including Macy's, Sears and JC Penney, are also shuttering dozens of locations across the country. The sudden vacancy of millions of square feet of space clearly affects the neighbors and land- lords of those subject properties, but it also creates a ripple effect up and down the retail landscape. While closures introduce significant volatility into the retail real estate envi- ronment, they also create opportunity for visionary entrepreneurs who have creative financing solutions in place. Now, more than ever, existing owners and landlords have the incredibly difficult task of trying to re-tenant their centers while facing in- creasing pressure from traditional bank lending sources and the wall of CMBS maturities. Luckily, for seasoned owners and opportunistic investors, there is a long Rolodex of private lenders ready to answer the call. From light value-add plays to total overhauls and repositionings, transactions that have an intrinsic value and capable sponsorship have the ability to obtain financing from a non-traditional lending source. THINKING OUTSIDE THE BIG BOX It's no secret that Macy's is closing at least 68 stores across the country in 2017. With some of the strongest real estate in the country, the corporation strategically partnered with Brookfield Asset Man- agement to develop 50 of these sites and maximize them to their highest and best use, outside of being supported by Macy's retail. This leaves 18 stores, and counting, in major metropolitan areas which are go- ing (or soon to be going) dark and bring- ing millions of square feet of vacancy into the pipeline. This number does not even take into account the recently announced Sears and JC Penney store closures. Con- sidering there are few alternative users for retail locations larger than 100,000 square feet, each of these spaces must be repositioned into a new use by visionary developers in the coming months. In recent deals, Calmwater Capital has seen such creative solutions firsthand. In one case, Calmwater formulated a propos- al for acquisition financing for a vacating Macy's box, with loan proceeds to entire- ly reposition the center upon execution of signed leases. The business plan included dividing the floor plates and multiple sto- ries into separate entrances for smaller retail tenants, adding new ingress and egress into the space with the addition of exterior escalators and turning excess parking into potential new pad sites. THE DILEMMA WITH ENCLOSED MALLS Enclosed malls present a unique issue for bridge lenders. Most are trading at more than 15 percent cap rates and, gen- erally, have a short term remaining on their anchor leases. At this point, anchors are not likely to renew, since so many are downsizing or going out of business. Some d e v e l o p e r s are success- ful in repo- s i t i o n i n g these types of properties by turning them into open air cen- ters or bring- ing in gro- cery chains, gyms, or movie the- aters. How- ever, given the huge d o w n s i d e risk on these deals, they are often- times a bet- ter fit for equity part- ners rather than debt providers. C a l m w a - ter also often sees a prob- lem arise when long lease terms are held with troubled an- chor tenants, creating co-tenancy issues, limiting short-term repositioning options and adding complexity for those contem- plating repositioning. No lender wants to enter into a deal waiting on a troubled an- chor tenant to close. There are, however, a few situations in which bridge lenders may finance en- closed malls, such as: • Refinancing on maturing pre-reces- sion loans for centers with strong spon- Bridging The Lending Gap The changes in retail can present some hurdles for financing for retail owners and developers. Here's how to overcome them. Bradley Ross and Connor Humphreys Bradley Ross Vice President Calmwater Capital Connor Humphreys Vice President Calmwater Capital

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