The long-suffering retail sector is starting to see signs of life as the US edges closer to the end of the covid-19 pandemic.

Retail properties are transacting and at a much higher level than in 2020. According to data from Real Capital Analytics, deal volume in 2021 in the retail sector was up 88 percent year-on-year, finishing 2021 at $76.9 billion. And average asking prices for retail properties jumped by 4.75 percent in the fourth quarter of 2021 and 20.76 percent year-over-year according to a February report from Crexi, a Marina Del Ray, California-based commercial real estate sales and leasing platform.

All of this means lenders are now starting to think about what it means to finance an asset class that is entering uncharted territory.

“Ten years back, almost any mall that was anchored by Lord & Taylor or Neiman Marcus was a sure thing,” says Toby Cobb, co-founder and co-managing partner of 3650 REIT, a national commercial real estate lender. “Today, you had better understand the demographic trends, competitive set, sales stats, access and egress, and why your mall is a winner when the mall across town is going to It is not that we don’t like Lord & Taylor and Neiman Marcus. It is just that not all of the malls anchored by these stores will make it in this cycle.”

3650 REIT has taken these lessons to heart, Cobb says. “We’ve been really selective in our lending for malls, but we have done it with the best owners in the business who know how to turn their asset inside out and utilise the excess land and the derelict big boxes. That has a lot to do with what we believe is our history of being an actual developer ourselves.”

The real estate investor’s recent activity includes a $95 million refinancing package for a grocery-anchored retail center in La Habra, California, as well as $60.5 million to construct Houston multifamily property loans totaling $165 million. But the stakes are high, Cobb says.

“I anticipate [multi-tenant retail] will pick up, as people are anxious to get back to not just a new normal, but a real normal”

Charles Foschini

“The losers are going to be big losers,” says Cobb. “If you can’t make it work, there is definitely going to be this idea that some of the losers are going to be totally wiped out, especially when you get into the mall space.”

When it comes to underwriting retail, macro changes are still having an impact, says David Robinov, managing director of investment sales at New York-based real estate capital advisory firm Ackman-Ziff. The sector’s borrowers are confronting the same macro issues that borrowers in other sectors are seeing, he adds. “As the 10-year Treasury creeps closer to 2 percent, we’re going to have a flurry of activity from our clients who thought maybe they could wait a little longer to refinance but are now getting spooked a little bit,” Robinov tells Real Estate Capital USA.

However, this could lead to a longer-term deterioration in transaction volume, as people are fearful about where rates might be headed. Other bigger picture considerations include the phasing out of the LIBOR benchmark, with a divergence in opinion on what will become the new benchmark for floating-rate loans. Additionally, construction costs are rising.

Retail 2.0

Glenn Rufrano, chairman of retail-focused trade group ICSC, reckons the key to retail survival is adaptation. “It’s a very complex answer to the question where is retail going to be? While we’re not prepared to answer that question, we’re prepared to say specific retail is going to do just fine, just like specific apartments and specific hotels,” Rufrano tells Real Estate Capital USA.

Rufrano, the former CEO of Phoenix-based diversified real estate investment trust VEREIT, is witnessing more retail properties being repurposed and a hybrid approach emerging.

“Retailers need to innovate, not sit back and believe what they’re doing today is what they should be doing tomorrow. And that innovation is, in simple terms, a combination of bricks-and-mortar as well as e-commerce,” Rufrano says. “What has emerged is retailers have learned you have to have a combination of bricks and mortar, people coming to the store, and buying through e-commerce, ordering electronically and getting delivery.”

The adaptation game

As well having a good grasp of omnichannel retail, ICSC prioritizes retailers that understand how to service their clientele.

“Service used to mean that when you walked into the store you would be met with someone who smiled and made you feel good,” says Rufrano. “Service today means that you know who your clientele is, you have data on that clientele, and you know how to service them with your stores and your e-commerce ability omnichannel.”

Rufrano estimated there are somewhere between 500 and 600 Class B and C malls on major highways and intersections that are likely to be reconfigured into a mixed-use property in the near future, combining retail with a healthcare facility, office space or multi-tenant residential property.


Year-on-year rise in US retail real estate investment volume


US retail transaction volumes in 2021, according to Real Capital Analytics

“A famous saying in the United States is we’re not over-built, we’re under-demolished,” says Rufrano. “We just have functionally obsolete buildings and they’re not necessary or they just don’t fit the format.”

But while there are often new uses for old buildings, this transformation can be tough.

“There’s a world of difference between strip centers, malls and grocery centers, and they’ve all been impacted differently,” says Cobb. “As far as the repurposing goes, the large department stores that anchor the malls are probably the most troubled elements of the retail sector because they’re bulky and difficult to repurpose.”

The repurposing model is not new, according to Daniel Fromm, senior managing director, capital markets, debt & structured finance at Newmark.

“We have seen plenty of deals where big box retail has been converted to another use or broken up into small spaces to better fit the new world of retail,” Fromm tells Real Estate Capital USA.

“Separately, we have seen transactions where excess land has been sold to investors to develop multifamily as well as industrial, to the extent zoning permits that specific use.”
While retail properties are still facing the same problems as prior to the pandemic, some new solutions have emerged.

“The most challenging trend for retail real estate is the continued growth of e-commerce, which has been a major boon to the industrial market,” says Fromm. “Grocery-anchored retail and ‘med-tail’ are two sub-sectors of the retail market that have seen continued stability and growth during the past two years.”

The new normal

Charles Foschini, a senior managing director at New York-based commercial mortgage company, Berkadia, believes there will be a resurgence of interest in multi-tenant retail as people get back to normal routines.

“Humans are very social and very connected,” Foschini tells Real Estate Capital USA. “And the easiest thing to do, as you get more comfortable and interacting, is to go to the mall to go shopping. Everybody wants to experience [this] and we’re seeing it already in restaurants – try and get a reservation in Miami, it’s nearly impossible.”

Foschini has a bullish outlook for the sector, despite its recent hard times. “I anticipate that to pick up, as people are anxious to get back to not just a new normal, but a real normal,” he says.