Retail Deals Are Slowing, But Lenders Remain Active

As a retail broker, Newmark’s Rob Ippolito “hears constantly” about an abundance of capital waiting to be deployed into the sector. The question, he said in a panel discussion at the ICSC Western States conference in San Diego this week, was whether pressure to get that capital placed would be offset by a rise in rates, allowing sellers to hit their numbers.

“At the end of the day, there has to be some capitulation on the part of sellers,” said Jim Hamilton, vice president of acquisitions at Brixton Capital. “The economics just don’t work. When we start to see rates stabilize and things aren’t as volatile, we’ll see transactions. But the problem now is nobody knows what the price should be, because debt is moving so quickly. It’s hard for a seller to conclude this is the right price. When rates stabilize, you’ll see the cost of interest rate caps come down on floating rate debt and people will start to normalize.”

Hamilton also said the “buyer of last resort,” 1031 exchange buyers, will “start disappearing” over the next few months because transaction volume is down.

Robert Ybarra, executive vice president at CBRE, said he sat down with upwards of 30 lenders a few weeks back at the Western States Mortgage Banking conference and said “lenders are willing to play – albeit at a higher interest rate.”

“Yes, there is debt,” Ybarra said. “We did have some funds exit the market; some are back, some are on the sidelines. But there is liquidity in the market; lenders want to get money out.”

Ybarra also noted that in addition to new allocations coming up in 2023, lenders had record originations in 2021 and are on track to do record numbers this year.

“By and large, allocations are larger than last year, but getting the money out will be more difficult,” he said. “That bodes well potentially for decreasing spreads in future.”

With that said, rates are obviously much higher than the lows to which the market has become accustomed. Ybarra said the floating rate index typically borrowed over bridge or construction loans was sub-0.1% last year, and is now a touch over 3%, a 300 bps increase. Longer term Treasuries are also up around 200 bps, he said.

Ybarra says that the index will likely peak in the first or second quarter and will “theoretically start to come down as the market reacts.”

“The issue is, they won’t go back down to levels we’ve seen previously – they’ll flatten out to where they are today,” he said. “In the shorter term, that will mean greater construction costs…lenders are keeping spreads wide. There will be a lag of activity. Ad until the Fed stops doing what it’s doing there will still be turmoil in the market.”

“It will be an interesting push-pull,” said Clint Marchuk, vice president of acquisitions at Vestar. “It’ll be a little slower at the end of the day until the dust settles and we get better line of sight on what our borrowing costs are.”