Retail’s Fundamental Disconnect

Getting deals done requires best in case sponsorship.

LAS VEGAS—The big thing right now is there’s a massive disconnect between the fundamentals of the retailers and the leasing fundamentals in the shopping centers, and the level of disruption and disconnect in the capital markets. Those thoughts are according to Adam Ifshin, CEO and founder of DLC, who chatted with GlobeSt.com at ICSC Las Vegas about the massive move in interest rates and the reduction of available capital from the banking center. That, Ifshin said, is a fundamental disconnect that rarely happens.

“We have the best leasing fundamentals we’ve probably had in two decades, and we have one of the more challenging financial markets for financing commercial real estate,” Ifshin tells GlobeSt.com. So how do you get a deal done in today’s universe/? He said that the first thing is to have best in class sponsorship. “Lenders have a myriad of choices, and a finite amount of capital, so they want to lend to the best in class operator, the best in class sponsorship, the ones that have the best relationships with the tenants, the most experience, and the deepest, most professional teams.” That’s number one, he said.

The second thing is that the deals have to be well thought out Number two, deals have to be well thought out, conservatively underwritten, and they have to be conservatively leveraged. “At this point, you cannot go into the financial markets and seek to achieve the type of leverage you might have achieved four or five years ago… It’s not there,” he said. “And if you price your transaction under the expectation that you’re going to get that type of financing, you are going to be disappointed and your reputation is going to suffer because you’re not going to be able to close.”

Some people out there today are being overly optimistic about what they can achieve, Ifshin noted. “They believe that interest rates will fall during the period of time they own an asset and they’re going to sell it at a much higher valuation.” That, or, he said they are just don’t know what the true cost of the capital is, so they misprice it.

“We are seeing lots of deals get dropped by buyers because they are unable to build the capital stack that they need to successfully close the transaction,” he explained. DLC has about $210 million worth of acquisitions in the queue, and the capital stack for all of it is completely set 100%. “We are completely financed… We have all the equity, we have all the debt capital, and we’re ready to close. However, that isn’t always the case.”

He also tells GlobeSt.com that there is other capital forming in the space. “The market remains competitive,” he said. “You need underwriting discipline. Just because some other people may be chasing a little harder and be willing to pay more, you have to stick to your knitting. You have to stick to your underwriting to what you know you can produce.”

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