Access To Capital The Main Hurdle For Retail Projects
As California heads into month eight of figuring out how to do business in a pandemic, retail experts are seeing the pandemic as a “stress test” separating the wheat from the chaff.
“Those that are healthy or were healthy pre-COVID or maybe had a little bit of a struggle, they’re going to be healthy post-COVID,” Shauna Mattis, executive vice president at JLL and a retail specialist, said at Bisnow’s State of Retail in California webinar. “Those that were maybe a little compromised pre-COVID have had to restructure or abandon their plans and they might not be the ones that survive.”
PWS co-President Brad Steinberg said his company is on the upswing right now. PWS is the country’s biggest laundromat developer, and Steinberg said it is looking for locations to build out 20 to 30 laundromats, either as a tenant or as a purchaser of the property, in the next 12 to 18 months.
“We are in expansion mode,” Steinberg said.
Petrovich CEO and President Paul Petrovich gave an example from the other end of the spectrum.
“Tenants that got away with murder on lease provisions and requests for certain types of leases turned out not to be the ‘I will always pay rent, no matter what’ tenants,” said Petrovich, a commercial real estate developer specializing in retail.
One of those tenants, Petrovich said, was Starbucks.
“They came back to the table recently on a deal we were working on and I basically took their lease and said no to everything. I gave them my typical tenant lease and said, ‘You are no longer that tenant that deserves literally 40 different provisions that restrict and tie up your center for 2,200 SF of occupancy.”
Addressing concerns about the future of retail, Mattis said that even before the coronavirus became a concern, she was seeing some signs of the lines between retail and other sectors blurring as people consider adaptive reuse as a possibility for retail space — turning retail into industrial space, hospitality uses or creative office, which she said was picking up steam even prior to the pandemic.
“I think at the end of the day, great real estate is great real estate. It’s going to continue to be great real estate,” Mattis said. “The exciting part about coming into it right now is watching what it’s going to develop into and being on the front line of that.”
Paragon Commercial Group principal Jim Dillavou agreed, but added a caveat: “Great real estate is great real estate as long as you have capital or access to it.”
In addition to having tenants to lease space, a significant hurdle for property owners and developers now is having that access, Dillavou said.
Banks just aren’t lending to certain property types, including retail-heavy or ground-up retail projects, Dillavou said.
“Try to go raise equity around a retail deal right now. It’s difficult and expensive if you can get it.”
Petrovich said he has seen these conditions firsthand.
“It’s been hard for me to sell some, what were considered triple A-type investments because people with less than 50% were unable to get financing because it was retail,” Petrovich said. “Even though it had a credit check, it’s just been a challenge in that regard. It’s making some investment sales harder. It’s putting upward pressure on cap rates.”