Christopher Muoio is a senior quantitative strategist with Ten-X Commercial. His primary responsibilities
include thought leadership, macroeconomic analysis and forecasting, and commercial real estate fundamentals
analysis and forecasting for more than 50 major U.S metro areas. He serves as Ten-X Commercial’s primary
hospitality-sector analyst and is responsible for his research team’s monthly employment-sectors report.
Reach Muoio at email@example.com.
Reductions of physical retail locations have been particularly acute among big-box retailers and department stores that often serve as anchor tenants for malls. Retail vacancies have
remained stubbornly high and absorption has been tepid,
despite a strong economic cycle. Any sort of cyclical
weakness would only make the issue more acute.
Vacant space is proving nearly impossible to fill with
other retailers, especially as demand remains weak. The
loss of an anchor tenant can trigger clauses in other tenants’ leases, allowing them to leave or seek better terms,
further exacerbating the problem for a mall owner.
The timing of the decision to repurpose mall space will
vary depending on the property’s capital structure, debt
levels and location. Another factor is whether or not the
local community or municipal government is applying
pressure to repurpose the space. If so, owners and investors should know if rezoning options will be made available. Retail properties typically generate more tax revenue
than their residential counterparts, thus making them
more attractive in the eyes of municipalities.
The higher the debt load for a retail property, the quicker the decision to repurpose the space needs to be, since
the need for cash flow is paramount for meeting loan
obligations. If a fast decision is necessary, however, this
also limits the available options, as redevelopment into a
hotel or some form of multifamily housing will likely require rezoning, demolition and significant construction.
This can take years and a significant in-flow of capital.
In many cases, all parties involved would likely be better
off if the owner sold the retail property to a developer or
larger owner who is willing and able to assume the risk of
such an undertaking. The same holds true if the owner is
a smaller local investor or real estate fund, as it likely represents an outsized portion of their portfolio. They may not
be able to bear the risk or required capital for extensive
Considering the downward trajectory of the retail
segment, it’s clearly desirable for any redevelopment
campaign to begin in a timely fashion. Financing is one
of the common sticking points for commercial real estate
transactions, and with subpar-performing retail properties,
it can be particularly challenging to secure a purchase loan.
Technology has made inroads in all aspects of real estate
execution and transactions, and it can also help commercial mortgage brokers and retail-property investors close
deals when time is of the essence.
In a recent example that showcases the power of online financing solutions, a technology-enabled direct
lender funded a $3.3 million bridge loan for the purchase
of a 27,000-square-foot retail center in the Northeast. The
transaction originally took place through a live online
auction, with the winning bidder planning to secure their
When the intended lender could not close the deal in
the allotted time, however, the technology-enabled direct
lender stepped in with the competitive 53. 3 million
loan offer and worked with the auctioneer to close the
escrow account within 14 days. As more and more retail
properties come on the market, technology is likely
to emerge as a key solution for bridging the gap with
necessary capital to reposition or create larger investment opportunities.
Choose an approach
In cases where a retail property’s existing owner or new
owner chooses to redevelop the asset, repurposing to
multifamily housing seems like the best use based on real
estate fundamentals. According to Reis Inc., apartment
vacancy rates are at 4. 5 percent, near the low point for this
cycle, and effective rent prices grew 3. 3 percent year over
year as of fourth-quarter 2017. Additionally, single-family
housing inventories are at multi-decade lows, with millennials still trickling into the market.
Once completed, a residential foothold brings a certain
amount of permanent foot traffic and population in direct
proximity to the remaining retail space. For this to be a
viable path, however, the property must be near highways
or mass transit that will make commuting to a central business district or another job center possible.
Continued on Page 64 >>
<< Retail continued from Page 61
“The timing of the decision to repurpose mall
space will vary depending on the property’s
capital structure, debt levels and location.”