Of the oncoming $300bn wave of vintage 10-year loans expected to mature between 2015 through 2017, nearly one-third of the balance will come from loans backed by retail properties, according to Trepp.
While this will lead to increased originations, more than $20bn of that $90bn or so in retail loans could run into trouble when it comes time to refinance, particularly those involving decades-old regional malls anchored by big box tenants like JC Penney, Sears or Best Buy, the data and research firm noted in a new report.
Retailers and property owners could avert losses by taking the lead of owners who are upgrading and redesigning facilities, implementing luxury retail, technological displays and hands-on showrooms to draw customers away from their computer screens and into stores.
“If you have a mall and ownership implements a new tech-based storefront or showroom, and that brings more people and better performance, that increases financials across the board, opens the eyes of lenders and leads to more issuance,” Sean Barrie, a Trepp research analyst, told Real Estate Capital. “That can also take pressure off of any other assets in a portfolio.”
An accompanying shift is taking place towards single-asset, single-borrower deals, which have become more appealing to investors and highlight the growing preference for high-end, luxury, prime-location retail properties. The owners of the Houston Galleria in Houston, Texas, for instance, recently paid off their $821m loan and landed a new $1.05b single-asset deal, becoming the envy of malls that are not faring so well.
As more capital enters the market and lenders compete harder for such assignments, underwriting standards could loosen, however. One measure of underwriting standards is the number of interest-only (IO) loans being originated, which are growing and considered riskier than amortizing loans.
“Lenders are looking at current performance and despite the risks, they think these loans will be easier to pay off in the long run,” Barrie said. “If they are able to pay off that’s well and good, but if not you might start to see the rate of IO loans drop.”