Commercial lenders are witness to the distress of retailers this year and are compelling many store operators to take on asset based loans over traditional financing. What does this trend indicate for the future of retail lending?
Retail is under increased distress this year. Last year retailers added about 17,000 jobs per month. Currently retailers are laying off roughly 9,000 employees on a monthly basis according to the Bureau of Labor Statistics.
Retailers not only have to compete with Amazon and other online sellers, they also have to struggle to maintain the glut of properties built during the ramp up to the Great Recession. Price Waterhouse Coopers estimates there is about 24 sq. ft. of retail space for every person in the United States. According to Co-star during the first half of this year 76 million sq. ft. of this space is out of use. Vacant retail space is fast approaching last year’s record of 82.6 million sq. ft. Analysts are already making drastic predictions for the amount of stores expected to close this year. Price Waterhouse Cooper conservatively estimates 90 million sq. ft. of retail space will be out of use by the end of the year. Credit Suisse is making even more drastic predictions. The group expects store closures this year to reach 8,640. These closures would amount to an unprecedented 147 million sq. ft. of vacant retail space.
Lenders are prompting retail borrowers to take out asset based loans in response. Asset based loans involve a pledge of a borrowers inventory or cash reserves as collateral. Once these loans were only considered for only the most distressed borrowers. The obvious pain of the retail sector has caused this type of lending to become more and more common. Retail was the largest user of asset based loans last year. In 2004 7.9 percent asset-based borrowers were retailers. Retailers now hold 10.2 percent of these loans.
Asset based lending puts commercial lenders, at the front of the line when retailers go out of business.
Lenders are most often paid in cash when asset based loans default. The issuers of asset based loans receive the majority of income from going out of business sales, as these loans involve a pledge of a borrower’s inventory as collateral. It can be expensive and time consuming for traditional lenders to foreclose and sell off vacant storefronts. The immediate guarantee of cash payments involved with asset based lending will give many banks greater assurance about offering financing struggling retailers.
Commercial lenders are obviously wary of financing retailers given the current economic climate. This will have a particular impact on lending to new retailers in the future.
Micheal Rose, an analyst at Raymond James, claims investors are not particularly concerned with banks lending to retailers. Rather investors are more concerned about bank exposure to commercial properties which may default. In the future lenders will be especially wary of financing new retail related construction projects. Lending to established retailers may continue, but new stores may find it difficult to secure start up funding. “ I don't think people are so worried that there cutting back or trying to get rid of what they have, but when new opportunities are coming up, at least some banks are being more cautious,” said Ann Scully CEO at Maryland based Howard Bank.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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