The appetite for retail is strong and is expected to be one of the most sought-after property types in 2026. Count on an increase in transaction volume due to continued low construction, falling interest rates and a moderating economy. Keep an eye out for bank, life company and CMBS lender appetite to improve from the lows seen in 2024 and 2025. Larger national and regional banks especially coming back into the market will push competition for deals. Non-bank lenders such as debt funds and mortgage REITs will continue to fill the gap, especially for value-add, re-tenanting and transitional business plan deals. Activity will pick up once rates drop below 5% and the increase in options will lead to competitive terms. Store closures by some national brands will be offset by smaller companies expanding.
Watch for loan amounts and leverage to increase as rates start to tick down. The spread between the cap rates and interest rates will tighten and push proceeds. There should be a downward pressure on cap rates as interest rates fall and an increasing willingness to consider larger LTVs. Lenders will need to underwrite higher insurance premiums, as well as higher expenses and costs for operators. Insurance premiums going up will be reflected in appraisals.
Leverage continues to be constrained by debt service coverage ratios. Max leverage will be hard to hit until rates decrease further. Grocery-anchored centers with top-tier performers will grab the most favorable terms. Borrowers will see 75% max leverage for the best deals, while most will fall in the 60% to 70% range. The best pricing will be for loans below 50% leverage. Core grocery-anchored centers will have the lowest rates at 5.50% to 6.75% fixed. Power/lifestyle/transitional retail product will price at 6.75% to 8% fixed. Construction loan prices will be similar with 0.5% to 1% fees and tighter draw mechanics. Debt yields range from 8.5% to 10% on a 1.25x to 1.30x DSC. Special-purpose retail properties will see 1.35x+ DSC. Most lenders prefer debt yield above 10% but will drop down for higher credit quality tenants.
Banks such as Wells Fargo, Truist, Regions, Bank OZK, Enterprise Bank & Trust, Synovus, Banc of California, Foothills Bank, Glacier Bank, Fidelity Bank, First Internet Bank, Axos Bank, Renasant Bank and Ameris Bank will be active. Rates will start around 5.5%. Banks will take a close look at global cash flows and portfolios.
Life companies such as New York Life, PGIM Real Estate, StanCorp Mortgage Investors, Ameritas, Protective Life, Aegon Asset Management, Thrivent, Manulife, TruStage, Farm Bureau Insurance and Security National Commercial Capital will fund deals. Count on life companies to offer some of the most attractive rates. LCs will target grocery-anchored centers with infill locations. Count on life companies to be more focused on the performance of the property versus the borrower.
Keep an eye out for CMBS lenders to be more active next year. Wells Fargo, Morgan Stanley, Goldman Sachs, Citi, Deutsche Bank, BMO Capital Markets, Natixis, KeyBank, Argentic and Basis Investment Group will all stive to compete. Borrowers will see mid- to upper 5% pricing. Look for CMBS lenders to provide full-term interest only in order to win market share.
Neighborhood strip and grocery-anchored centers will continue to find favor among investors and lenders. Power centers in growth markets with credible re-tenanting stories and tenant sales data will be easier to finance. Lifestyle/experiential products will also see strong terms. Unanchored strip retail in infill locations where rents are under market will remain desirable. Malls and big-box centers will continue to be hard to finance. Special-purpose properties, such as car washes, dry cleaners and gas stations, will also be tougher as these are hard to re-tenant.
Credit tenants are the most desirable and command best rate and structures. Investment-grade credit tenants with at least 10 years left on the lease will be the most sought after. Grocers such as Aldi, Sprouts Farmers Market and Whole Foods Market are the most sought after. Necessity tenants such as hair and nail salons, as well as restaurants and service tenants such as FedEx Office and UPS Store will also be desired. Buc-ees is expanding in many Sun Belt states and will be targeted, while social media favorites such as Crumbl and Swig remain popular.
The coffee QSR segment is starting to see cracks as Starbucks closes stores to reduce footprints, and the space becomes more crowded with Black Rock Coffee Bar, Dutch Bros and Black Rifle Coffee. There is some disconnect in the single-tenant space with chains like Walgreens and Family Dollar struggling.
Single tenant uses, such as franchise health clubs, in over-saturated industries without credit backing could find increasing difficulty.
Lenders will target urban locations in major markets, as well as lifestyle centers in the top MSAs of Sun Belt states. Lenders are looking toward major cities and specifically locations in growth submarkets. Dallas, Austin, Phoenix and Las Vegas will remain hot. Primary cities in the Southeast such as Atlanta, Nashville, Tenn., Charlotte, N.C., Raleigh, N.C., Tampa, Fla., and Miami will also see available capital. Lenders will shy away from San Francisco, Portland, Ore., Chicago and other office-based cities as changing politics hampers development. Smaller markets and those especially in more tertiary locations (less than 50,000 in a five-mile radius) will be difficult.
If there is a slowdown in the economy, smaller markets will feel it first. Lenders will be less likely to put money in areas that were hot during the pandemic and are now overbuilt.
Borrowers with two times the loan amount in net worth and at least 10% to 20% in liquidity will be the most sought after. This typically depends heavily on the merits of the opportunity. Some lenders want to see a minimum of $5M net worth or double the loan amount. Some will want to see a net worth at least equal to the loan amount. Others will look at the complexity of the transaction and make a judgement of whether the borrower has sufficient means to execute. Borrowers lacking in net worth or experience will typically have to compensate with higher net worth and liquidity or a property with less expertise required.
