Investors and Lenders Still Find Some 'Stable Activity' in Retail

As MSCI wrote in a recent report on capital trends, “Retail is still a dirty word for some investors and lenders. The fact is though, that while online shopping is growing quickly, the plurality of consumer spending still happens in a store location.”

Census Bureau data, available from the Federal Reserve Bank of St. Louis, shows the leap that ecommerce took from 11.9% of retail in the first quarter of 2020 to 16.5% in the second quarter because of pandemic shutdowns, only to drop back down to 14.4% in 2022 Q2 and now back up to 15.4% in the second quarter of 2023. That’s still more than in pre-pandemic times, but the current numbers, moving back to previous trends, is still a minority of total sales.

Part of that is the types of products that people buy online and in person and part is that people look for social interaction and go to stores for more than practical reasons. In-person retail is a long way from being completely online.

“Lending on retail properties was lower in the first half of 2023 than both a year earlier and for a typical first half of the year in the five years before the pandemic,” MSCI wrote. “Still, there are pockets of stable activity in the sector.”

However, who largely lends to them has changed. Overall, there were significant shifts in the mix of lenders from 2015-to-2019 averages to 2022 and then to the first half of 2023. For example, regional and local banks used to make up only 25% of lending. By 2022, that shot up to 47%, then back to 40% in the first half of this year. The reason for the drop: more about challenges the banks currently face and less about the retail sector.

National banks had 17% in that five-year average, going down to 14% in 2022, but then back to 16% this year. CMBS loans also showed some big changes, going from 27% in pre-pandemic times to 13% in 2022 and up to 17% in 2023.

The balances in different retail types were wildly different. For example, shopping centers saw 21% CMBS lending, 15% insurance, 17% from national banks, and 34% local and regional banks. Malls had 57% from CMBS and 25% from national banks. Single-tenant retail had 12% from national banks and 59% from local and regional banks. Individual shops: 14% national banks and 54% regional and local banks.