Trade War Rattles Retail Deal-Makers, Especially Lenders

In the world of mystery and wonder that is the current tariff landscape, the buzzwords for business have been instability and uncertainty, which also happen to be two of the least desired words in the corporate world for the way they can freeze C-suite decision-making.

This is especially unfortunate for those working on deals in the retail sector, which successfully beat back the threat of e-commerce to exceed expectations over the past few years.

With tariffs leaving so much confusion in their wake, the financing and refinancing of retail real estate has become frozen in place in many cases, as the Trump administration’s import levies look to negatively affect retailers on several fronts.

Brandon Singer, founder and CEO of Retail by MONA, notes that retailers are tapping the brakes on deals until they can determine the economy’s direction.

“We’ve seen a pretty significant temperature check from tenants looking to lease space, especially the ones that are either based overseas or are producing things overseas,” said Singer. “A lot of them have said, ‘Let’s see how this shakes out before we sign the lease or take the next step.’ ”

David Schechtman, senior executive managing director at Meridian Investment Sales, is hearing much of the same hesitation.

“People are saying things to us like, ‘I’m interested in purchasing this retail piece, but I’m having some reservations — even before I get to the financing — about transacting in general, because of what everybody’s calling uncertainty,’ ” said Schechtman. “I’ve noticed that in the past two or three weeks, they’re not saying tariffs, they’re just saying uncertainty.”

This caution is growing on the lender side as well.

Cynthia Wang is an executive vice president in the commercial mortgage division of Apple Bank. Classifying the bank’s general lending philosophies as especially conservative, Wang notes that the bank has been “somewhat pessimistic” about retail for at least a decade.

The tariffs are now making bankers’ caution even more pronounced.

“The tariffs will negatively impact all retail tenants whether they’re small mom and pops, big-box users, or even sellers of high-end luxury goods, which are almost all imported,” said Wang. “At all retail establishments, the goods will become more expensive. They’ll buy fewer items and take less risks, so there will be less inventory on the shelves. And that’s always a bad look.”

Wang notes that based on all this, lending structures for retailers are going to tighten.

“Lenders like us, who are already conservative, are going to get more conservative,” said Wang. “We look at the borrower very carefully as it is. The borrower should really have deep pockets to sustain a downturn. We probably will impose structures such as a springing debt service guarantee in the event debt service coverage falls below a certain threshold — say, 1.2 times or something — due to the failures of retail tenants. We’re going to look at lending only to strong borrowers who can afford these dips.”

As such, Apple Bank will be subjecting retail borrowers or applicants to considerably tighter scrutiny in several areas.

“We’re going to take a very pessimistic view of sales and profitability. To the extent there’s percentage rent in the leases, we’ll eliminate all of that,” said Wang. “And we’ll take a harsher look at the break-even analysis. How far can the rent go down?”

Toby Cobb, managing partner and co-founder at lender 3650 Capital, noted that last week Barclays released the first new commercial mortgage-backed securities (CMBS) bond pricing since the imposition of the current tariffs and has widened credit spreads, obviously bad news for anyone preparing to seek financing.

“If you look at the deal that launched pricing in CMBS, it launched at 110/120 behind, where the last print was 100 over. That’s not immaterial,” said Cobb, who expects to see even wider spreads lower in the capital stack. “Credit premiums are higher, and that’s a proxy for everything being more risky. That’s anywhere between half a point and a point on execution for people in the arbitrage business on a five-year deal. If the loan sellers were looking to make two points on the sale of their $1 billion deal, or $20 million, that just got cut in half.”

And Retail by MONA’s Singer notes that the tariffs will likely keep interest rates higher for longer than they might have been otherwise.

“The tariffs didn’t come into play just because of inflation,” said Singer. “If interest rates aren’t coming down, it’s obvious that less people are borrowing money, and that the cost of financing or refinancing acquisitions or existing assets is getting more expensive. That’s what we’re seeing.”

Wang, who noted that Apple Bank’s underwriting standards are so conservative that the bank hasn’t had a default in over 30 years, said that its already low loan-to-value ratio could fall even further as a result of the tariffs.

“With a lower loan-to-value, the borrower will come out of pocket if necessary to service the debt because there’s too much equity to protect for them to default,” said Wang. “Even during COVID, I had a bunch of hotel loans where the hotels were vacant and bleeding cash, but they all came out of pocket and serviced the debt. You have to protect your equity when it’s a low loan-to-value.”

To help navigate all this, Meridian’s Schechtman said his company is reminding clients that the tariffs could wind up having short-term impacts on otherwise long-term ventures.

“When somebody says, ‘My loan matured. I need to renew it. I need a new mortgage. Maybe I should just pay it down because rates aren’t great and the banks are being selective.’ What we’re saying to them is, ‘Do you think we’re going to have four months of uncertainty? Six months? The mortgages you’re looking at are five, seven or 10 years,’ ” said Schechtman. “People tend to calm down, or call you back that day or a day later and say, ‘You know what? You’re right. I’m being too impetuous because the news is coming at us too quickly.’ ”

Singer said he believes that if tariff uncertainty carries on somewhat long term, retail tenants, faced with a higher cost of goods and other disruptions, might start to require lease protections akin to those granted to some tenants during COVID.

“During COVID, tenants would say, ‘I’ll sign this lease, but if there’s another government-mandated shutdown or we’re not able to open, I’ll need relief on my rent,’ ” said Singer. “I’m assuming some mechanism will come into play, at least in the short term, that will make tenants feel a bit better about committing when there’s all this uncertainty in the market.”

Even with all this, there are some who see signs of promise within the chaos. Don Tepman, principal and founder of TownCentre Capital and the Internet’s StripMallGuy, noted that according to the numbers retail is still holding strong, and that lenders have reasons to transact even despite anxiety about the effect of tariffs or the direction of the economy.

“You’ve got vacancy rates around 4.1 percent, near all-time lows, and lenders know that,” said Tepman. “You also have lenders that are trying to put money out. They slowed down considerably coming out of COVID, and they’re dealing with regulation and balance sheet issues. So, right now, a lot of lenders are playing catch-up and want to be aggressive in putting money out. We’re seeing a lot of interest from life companies and smaller local banks that like the retail space.”

And Wang noted that the lack of economic clarity can provide a conservative bank like hers with its choice of deals.

“No one is refinancing in this higher interest rate environment unless they have to,” said Wang. “But there are perfectly good properties, including office and retail, which have their loans maturing. We’ve taken good advantage and refinanced some of those, and we can cherry-pick the good properties.”

However this shakes out, it’s worth noting the wild roller coaster trajectory the retail sector has ridden and the resilience it has shown in the face of so many obstacles. 

In recent decades, retail in the U.S. has survived the death of mall culture, the Great Recession, the emergence of e-commerce and the COVID-19 pandemic (which boosted that e-commerce). A belief that retail will eventually prosper on all fronts despite tariff chaos is justifiable due to the simple fact that the sector has survived in the face of, and thrived in spite of, so many other periods of disruption and disaster.

In the end, the fate of the sector may come down to how strong a stomach those enmeshed in it have for periods of uncertainty, and how tightly they can hold on until stability returns.

“What’s important to keep in mind is that for retail, we had coronavirus, then we had the rate spikes long in advance of this tariff horseshit,” said Schechtman. “We’ve already rebounded from so many major material wounds that I think the banks are actually being a little bit more resilient when they underwrite it and put money out. The banks are open. They’re lending. It’s the owners, buyers and sellers who are being more tentative.”