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Retail’s Latest Lifeline? Equity.

More funds are pouring into the brick-and-mortar space as it rebounds from the financial depths of COVID-19


Sure, retail has weathered multiple market disruptions. E-commerce, anyone? Pandemic lockdowns? Whatever its resiliency in the past, experts say it will now likely need to lean heavily on equity investments to spur deal activity amid today’s economic headwinds. 

Lenders and finance brokers who gathered at the annual ICSC conference in Las Vegas late last month expressed confidence that many retail properties, particularly shopping centers with grocery stores as anchor tenants, are better positioned than other commercial real estate sectors in a higher interest rate environment with generally healthy cash flows. However, increased borrowing costs from rising interest rates in a tighter lending environment, with many banks now on the sidelines, mean that retail landlords will need to find equity to finance development deals or refinancings.

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“Even if rents are the same, they’re not yielding the same loan proceeds that we were seeing years ago when rates were much lower, so, as a result, you have to have a lot more equity in a deal,” said Eric Flyckt, managing director and senior vice president at Northmarq, a loan originator and broker. “If we are talking about a development deal, for instance, in today’s world you are going to have to have a higher percentage of equity than in prior years.”

Flyckt said equity is especially important to finance retail construction deals with fewer construction lenders in the market who have stronger underwriting standards. With refinancing deals, mezzanine and preferred equity providers step up to bridge the gap on overleveraged loans that are near their maturity date, according to Flyckt. 

Ellen Comeaux, senior vice president and commercial division leader at TIAA Bank, said retail sponsors will need to insert more equity into financing deals due to higher borrowing costs as well as other increased expenses like labor and insurance. Private equity may also be “a solution to fill the need for preferred equity” when property owners encounter shortfalls for refinancing deals, escalating construction costs, or are in need of additional capital for acquisitions, she added. 

In addition to more creative deal structures with increased equity from well-equipped retail sponsors, Comeaux also foresees in 2024 increased use of cash-in refinances — with lump sum payments up front to secure better terms — even though the practice is rare now. This will result in investors seeking more flexible finance structures including extended interest-only periods, shorter-term deals, and transactions with flexible prepayment options. 

While enclosed malls and some big-box stores have faced severe struggles of late, vacancy rates overall for retail properties are low and demand has been strong since restrictions from the COVID-19 pandemic were lifted, according to Comeaux. She said retail has not faced the swings of other asset classes like multifamily and industrial, which saw cap rates drop to record lows early in the pandemic when interest rates were near zero and there was increased investment activity. 

“Retail’s cap rates didn’t drop significantly; thus they have not seen the relative movement up in cap rates either,” Comeaux said. “This has made retail — particularly those neighborhood strip centers — a source of stability in what is otherwise a relatively volatile market. Stability is attractive.” 

Dwight Mortgage Trust (DMT), an affiliate real estate investment trust of Dwight Capital, entered the retail market for the first time in late May with a $12.75 million bridge loan for Pine Island Plaza, a 104,000-square-foot, grocery-anchored shopping center in Sunrise, Fla. The 21-tenant South Florida property includes National Supermarket, which is opening in June and committed to a long-term lease. 

Ian Hawk, vice president at DMT, said he has heard from a number of private equity players with plenty of dry powder to deploy who are interested in investing in certain anchored retail properties due to strong characteristics the sector offers in a period of widening cap rates. He noted that in the last five years, healthy retail properties like grocery-anchored shopping centers have thrived while many struggling properties like indoor regional malls have been redeveloped or repositioned. 

“We believe that we’re at the point in the retail cycle where as a secular trend we think retail is going to improve,” Hawk said. “You have triple-net leases, you have relatively low occupancy costs and long-term leases with good tenants, and, if you could curate it right and a lot of that ‘bad retail’ has been washed out and now you’re left with service-oriented or pandemic-proof retail, we think that that has a lot of viability in the future.”

Anjee Solanki, head of U.S. retail at Colliers, said there will likely be more equity players stepping in to lead deals in some West Coast urban markets like Seattle and Portland where many businesses were hampered by slow reopening efforts during the height of the pandemic. She said this dynamic can enable more opportunities for those looking to invest in Class A retail locations. 

“In those urban environments, you’re gonna see those creative structures,” Solanki said. “But that is not a bad thing because what it’s doing is it’s bringing a new wave of retailers that did not have the opportunity to get into these downtowns an opportunity now to get in and position themselves on the A corner versus maybe the A-minus or the B corner.” 

When it comes to deciding where to deploy capital, private equity and similar funds do what everyone else does: look at the fundamentals. 

While the retail sector contends with financing challenges, like other areas of CRE, those fundamentals remain strong. James Bohnaker, senior economist at Cushman & Wakefield (CWK), noted that shopping center vacancies are at their lowest level since before the Global Financial Crisis 15 years ago. Unlike multifamily and industrial, retail also didn’t experience a “huge run-up in prices” during the past few years, according to Bohnaker, which should limit the negative effects of higher cap rates.

Bohnaker said much of retail’s resilience has been driven by consumer preference for “flexibility” in shopping habits post-pandemic. He is forecasting a “strong recovery” for the retail investment sales market once interest rates settle in more because of the strong occupancy rates at many properties. 

“We’ve seen this explosion in terms of e-commerce over the last five to 10 years, which kind of coincided with a lot of retailers going bankrupt and closing stores, and now things have stabilized,” Bohnaker said. “And what we’ve had the last year or so is people returning to stores for the experience and having that flexibility whether it be returning items and not dealing with the shipping headaches of returns.”

Much of retail’s recovery has stemmed from a greater appreciation for socialization and in-store experiences for certain shopping items after these opportunities were largely lost during the pandemic’s start in 2020, according to James Famularo, president of retail leasing at lender and  brokerage Meridian Capital Group. While much of retail is performing well, Famularo noted that employers bringing workers back into the office more regularly would make a big difference for smaller retail businesses located near office buildings, especially in downtown settings. 

Famularo said Meridian’s leasing activity in New York is more than 20 percent up so far this year compared to 2022, which was a record year for his team. On the financing end, Famularo stressed that properties with national credit tenants will have a far easier time landing loans.

“The question that I get asked constantly is, when there’s a non-credit tenant, what is the likelihood of them surviving? And if they don’t survive, what’s the length of time that it would take to re-tenant the asset?” Famularo said. “There’s certain segments in certain corridors and certain areas that rent quicker than others.”

Andrew Coen can be reached at