What is the current situation like for retailers? Have they found ways to adapt to e-commerce?
Cook: More retail space has been occupied every quarter since the end of the recession. … We’re seeing a lot of retailers expand. And the retail expansions mostly are in the value sector, so we’re seeing Ross Dress for Less, HomeGoods, T.J. Maxx, Marshalls, all of those guys are opening up new stores.
In addition, we’ve had this new ironic phenomenon of clicks-to-bricks retailers. … Warby Parker, they announced they were doing 25 locations [last] year. Casper announced 200 locations (within the next three years). UNTUCKit, Bonobos, all of these traditional online retailers are now opening up physical stores. Now, granted, those stores have much smaller footprints than, say, a closed Toys R Us, but if you just look at store counts, the overall store count is still rising.
What’s happening with lending in the retail sector? Are lenders stricter about deals they accept?
Board: Not for grocery-anchored and/or neighborhood retail assets. However, in regard to refinancing big-box-anchored [properties] and power centers, the answer is yes. Lenders are requiring higher debt yields and debt-service coverage ratios to give them less risk within the capital stack.
There is still a significant amount of liquidity for retail throughout the capital markets. The two most sought-after subsectors of retail right now are grocery-anchored and neighborhood retail assets. Power centers and big-box-anchored centers are still able to get financed. They are just being scrutinized a little tighter with underwriting regulations due to co-tenancy, kick-out and termination clauses tied to sales, and the overall parent-company risk of some of the big-box retailers in today’s market.
Are many of the retail properties underpinning commercial mortgage-backed securities in trouble?
Board: I don’t believe there is a significant share of retail that will be in trouble. We are on the back end of the era of the super-aggressive loans that were made prior to the crash of the financial market. Fortunately, outside of mall assets, retail fundamentals have continued to stay relatively strong. … The liquidity from debt funds and the ability to go a little higher on the capital stack has created another bucket of money to complement the CMBS [commercial mortgage-backed securities] market and allow for borrowers to pay a little higher rate for a shorter-term, higher-leverage, more flexible financing option.
The CMBS market is still eager to finance retail properties, and retail continues to be one of the highest percentages of asset classes financed by CMBS. However, securitization pools used to allow for up to 25 percent allocation to retail which, in most cases, has now been reduced to 20 percent. [That] has caused CMBS lenders to look for alternative asset classes in less desirable locations to help balance out their pools.
What about restaurants, bars and others types of businesses capable of driving growth for retail?
Cook: The F&B (food and beverage) sector is still growing. If you look at individual players, the F&B sector has always had a lot of churn, so as old concepts are going out, new concepts are coming in. And for most of this current cycle, the hot, expanding retailers have been the fast-casual players. The boom really started with Chipotle.
There’s a lot of expansion around different experiential, destination retail. There’s a lot of interesting new stuff coming, from your basic trampoline parks and bounce houses to more complex things. There are several chains that have axe throwing, adult putt-putt golf, darts and bowling. Dave & Buster’s, Punch Bowl Social, all of those entertainment concepts are expanding right now.