For the past few years, there has been a premium put on grocery-anchored retail transactions. These grocery-anchored retail transactions are holding up much better than non-grocery anchored properties in the COVID-19 environment. Many of our retail-focused clients who have grocery-anchored assets are going to be receiving percentage rents this year from their tenants. The inline tenants may not be able to make rent payments, but as long as the grocery anchor remains open and shoppers can secure supplies on-site or through a reasonable home delivery timeframe, this retail asset will generally perform.
Because we are in a totally different climate compared to the 2007 recession—a medical crisis causing an economic shock, not a financial crisis, lenders are going to be more focused on non-grocery-anchored asset performance. The mortgage industry is bracing for a drop in April rent payments, and possibly for a drop in rent payments for some time to come. Depending on the lender and the segment of the retail market, we are hearing different things about forbearance and whether lenders will allow borrowers to spread out loan payments. As of right now, nothing has been confirmed and these will be considered on a case-by-case basis.
Some lenders, such as banks and life companies, might move loans to interest-only or forbear payments for a period of time, say for 90 days. Although we can’t predict how CMBS lenders will react to mortgage delinquencies, first quarter economics for retail will look good when quarterly reports are sent to the lender/servicer within 45 days of the end of a quarter. The issues will appear in the second quarter, when financials are sent to lenders by August 15th. This will complicate situations that involve a lockbox for major tenants or low debt coverage triggers. Most likely, lenders will be in touch with servicers and will convey what is ongoing on the ground so that come August 15 servicers won’t have to activate lockboxes.
As we move through the COVID-19 environment, lenders will be looking to help borrowers and these retail-focused borrowers will need to communicate with their lenders if they need relief. In the first quarter, we believe there are going to be some forbearance measures granted. Therefore, now is the time for borrowers to start documenting and to be transparent with their lenders. If borrowers are going to use this crisis to be opportunistic, it will not have a good outcome for them and for their relationships with their lenders.
It helps to remember that there is still strong, pent-up demand for investing in grocery-anchored transactions today and that will continue. Although some lenders are holding back, some are in the market, actively quoting. It’s simply an issue of how do you underwrite a mortgage if you can’t predict cash flow?
Dan Rosenberg serves as a managing director of Cohen Financial, a division of SunTrust, now Truist, and a national real estate capital services firm. He can be reached at [email protected] or at (312) 282-1833.
