It’s Not Closing Time for Retail Lending
Ely Razin June 15, 2016, 12:21 p.m.
Recent bankruptcies at stores like Sports Authority, Fairway and Aeropostale—especially coming on the heels of store closures or poor sales at other prominent retailers such as Macy’s and J.C. Penney—seem to demonstrate that retail, and by extension, retail lending, can potentially be risky business.
While it is always a good idea to conduct your due diligence, it’s important to remember that where there is risk there is also opportunity. Before ruling out retail, there are several factors worth considering for those on the lookout for financing opportunities.
Sure, there are lenders who could lose out because of retail bankruptcy. For instance, Credit Suisse, which recently laid off 2,000 workers and posted a first-quarter loss amid restructuring challenges, is behind a 2009 round of financing for the original Fairway Market, at 2131 Broadway and West 74th Street. The $4.6 million loan, a leasehold mortgage that is part of a credit agreement of $124 million, is cross-collateralized with about a dozen other New York properties, including a Fairway at 480 Van Brunt Street in Red Hook, Brooklyn, and one at 2328 12th Avenue in Harlem.
Though gloomy news often overshadows good news, that doesn’t mean there isn’t any of the good stuff.
In the first quarter of this year, total retail sales increased 2.2 percent over first-quarter 2015, according to the U.S. Department of Commerce. And, of course, there are specific stores that are doing well. Take Home Depot, whose shares are up nearly 19 percent this year.
Lenders to Home Depot properties include New Jersey-based Investors Bank, which financed a $42 million loan in 2014 for Home Depot Plaza at the intersection of Bristol Pike and Woodhaven Road in Bensalem, Pa., where Home Depot is one of three anchor tenants.
One possible factor behind the home-improvement retailer’s success is a real estate trend that would seem to have little to do with retail, namely the housing recovery. Home Depot Chief Financial Officer Carol Tomé said in a May earnings call that home equity values have increased 94 percent since 2011, prompting homeowners to spend money on their properties because they view it more as an investment than an expense.
Another factor worth examining is Home Depot’s integration of e-commerce and brick-and-mortar stores. Online sales increased 21.5 percent in the first quarter and make up nearly 6 percent of Home Depot’s $90 billion in annual sales, Bloomberg News recently reported. And the retailer said early this year that many e-commerce customers end up in actual stores, where they pick up about 40 percent of online orders.
Home Depot’s strategy is just one illustration of how the rootlessness of e-commerce and the corporeality of real estate are not mutually exclusive. Warehouses are another example. Although these are considered industrial properties, even e-tailers generally need a physical location in which to store their goods. Investors and lenders, then, can put money into real estate connected to the retail industry even if they shy away from traditional retail properties.
Other variables include the ever-important location. Retailers in upscale shopping centers, for instance, may do better than those in harder-hit middle-income malls. In other cases, retailers may be able to fill a hole in a market vacated by predecessors that closed up shop. For instance, the Macy’s at Valley Mall in Hagerstown, Md., a 120,000-square-foot anchor store, is due to be replaced by H&M in 2017 and could potentially succeed where Macy’s didn’t.
And then there are real estate investment trusts, which provide a way to invest in retail without investing too heavily in a single retailer. Options include REITs focused on shopping centers, like Kimco Realty, whose shares rose 50 percent in the past five years, and diversified REITs like W.P. Carey and Starwood Property Trust, which have multiple property types in their portfolios.
So is retail lending a safe bet? Well, it’s not a guaranteed win, but there are certainly enough reasons to consider shopping around for retail lending opportunities.
Ely Razin is CEO of CrediFi, a big data platform serving the commercial real estate finance market. He can be reached at email@example.com.