E-commerce is wreaking havoc on brick-and-mortar retail sales, and the declining foot traffic is hurting many shopping malls, strip centers and Main Streets across the country. The rise in empty storefronts is understandably troubling for commercial real estate owners and the banks that lend to them.
But the great retail shakeout is presenting some new and interesting opportunities for commercial real estate lenders.
One is in financing the conversion of all that vacant retail space into new uses — restaurants, health clubs, medical facilities, community colleges, movie theaters and office space. Ford Motor Co., for example, recently moved nearly 2,000 employees to an abandoned Lord & Taylor store that had once anchored a suburban Detroit shopping mall. A six-store strip center outside of Columbus, Ohio, was recently acquired by a nonprofit ministry that converted the space into a health clinic and food pantry, in a deal financed by Heartland Bank in nearby Gahanna.
Norm Nichols, an executive vice president at the $137 billion-asset KeyCorp in Cleveland, said that with the increase in vacant retail space, it is crucial for banks to foster relationships with developers who have experience in repurposing commercial properties that have become obsolete.
“Retail going forward is going to be less about new development and more about reimagining existing square footage,” said Nichols, the national manager for real estate project finance at Key. “We are actively looking for clients who have proven track records of being able to reinvent space.”
Another opportunity is financing the acquisition or construction of industrial warehouses and distribution centers. While the surge in e-commerce sales — expected to top $450 billion in 2017 and reach close to $700 billion by 2022 — has been a downer for retail real estate, it has been an absolute boon to industrial real estate.
Simply put, the likes of Amazon, Zappos and W.B. Mason need massive amounts of space to store their goods, and they want properties to be very close to major population centers so they can get goods to customers within hours, not days.
“If you’re a bank and you want a new business opportunity, you better focus on anything that’s industrial or warehouse, and you better have lenders who understand the business,” said Peter Minshall, the managing partner at Washington Capitol Partners and longtime real estate investor in the Washington and Baltimore areas.
The trends are compelling. According to the commercial real estate firm CBRE, warehouse and industrial properties have seen positive net absorption — that is more space being leased than vacated — in 29 consecutive quarters, the longest such streak in more than 20 years. With demand soaring, warehouse vacancies are at near-record lows, rents are rising and building in the sector is booming.
In the Atlanta area, some 17 million square feet of new industrial space is currently under construction and in California’s Inland Empire, where the vacancy rate is a scant 1.3%, nearly 28 million square feet is being built, according to CBRE.
Industrial is not always an easy space for banks to play in, however.
Bo Cashman, a Baltimore-based senior vice president at CBRE, said that institutional buyers are so hungry for industrial properties and are so flush with cash that they don’t even need bank financing to acquire them.
On the construction side, the biggest warehouse user of all, Amazon, is building facilities that are so big and have such specific needs that only the largest banks and investment banks can participate in the financing — if Amazon needs financing at all.
“We have no shot at banking Amazon,” said Scott McComb, the chairman, president and chief executive of the $884 million-asset Heartland Bank.
Still, there are opportunities for smaller banks that have the expertise and relationships in industrial real estate and are willing to take some measure of risk.
Thanks to a longstanding relationship, Minshall in 2014 was able to obtain a loan from a Maryland community bank to acquire a warehouse property outside of Baltimore that had been mostly vacant for several years. That facility, with more than 200,000 square feet, is now fully leased to W.B. Mason, an office-supplies dealer.
And while most of the big players in e-commerce want state-of-the-art facilities, McComb said that demand for older industrial properties is increasing as well, presenting opportunities for community banks like his.
Heartland, for example, has several clients in the microbrewing business that have taken over older industrial space, McComb said.
Whether its older properties or new construction, opportunities abound in industrial real estate and more banks want in.
Nichols said that while KeyCorp has financed some deals involving warehouse and distribution facilities, it intends to allocate even more resources to the sector over the next several years.
“We are in the industrial space, but we would like to be in it even more,” he said. “The fundamentals are likely to remain very healthy.”