ICSC 2023: Higher Capital Costs Mean Retail Tenant Credit Quality Matters More


The credit quality of retail tenants is taking on an increased importance for commercial real estate investors in an era of high capital costs.

Stephanie McGowan, managing director of real estate at Blackstone (BX), stressed at the ICSC conference in Las Vegas on Monday afternoon that while larger anchor retailers are able to withstand increased expenses for labor, construction and debt, smaller tenants are forced to tread far more carefully. 

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“Looking at the credit quality of our cash flows is a big focus, certainly in this environment,” said McGowan during a panel titled “The Future of Capital Markets” at the Las Vegas Convention Center. “We’re watching really closely the increasing cost of debt for these mom-and-pop businesses, which is a real challenge for them.”

McGowan noted that Blackstone overall has a “conviction” and “enthusiasm” for select or certain areas of retail with the sector showing resilience through various market challenges like threats from e-commerce. She said retail also provides solid yield opportunities and, with little supply on the market, Blackstone has netted some better-than-expected prices on recent properties it sold. 

Ellen Comeaux, senior vice president and commercial division leader at TIAA Bank, said the retail sector is not experiencing the wide swings in spreads like other asset classes of late, which bodes well for the overall image of the retail sector in the CRE capital markets. She cautioned, though, that with high debt and other expenses like labor and insurance, more sponsors are going to need to insert equity into any refinancing deals.

“I think that there’s going to have to be some creativity and, hopefully, there’s going to be well-heeled sponsors that are able to insert extra equity into transactions,” Comeaux said. “Three years ago the concept of cash-in refis was very rare, and now I would say probably eight out of 10 deals I’m seeing have a cash-in component to it, and I think there’s going to be more of that.”

Comeaux said TIAA continues to lend  in the retail space, mainly in neighborhood shopping centers, but the company is being “more selective” where capital is deployed.

Brian Bailey, a senior policy adviser on CRE matters for the Federal Reserve Bank of Atlanta, said while there remains concern about a possible recession, the 253,000 jobs created in April bodes well for the economy and the retail industry in particular. 

“I’m of the school that we need to create about 100,000 jobs a month just to keep up with population growth,” Bailey said. “So from that standpoint I think the great news for the retail sector is that jobs continue to be created and people should have money to continue to spend.”

Andrew Coen can be reached at acoen@commercialobserver.com.