Ama­zon’s gro­cery ex­pan­sion a threat to CRE, banks fear

National Mortgage News - - Contents - By andy peters

shop­ping cen­ters an­chored by su­per­mar­kets were once a cov­eted lend­ing op­por­tu­nity at TowneBank. While the Portsmouth, Va., bank hasn’t pulled the plug com­pletely on them, its loan of­fi­cers are def­i­nitely hav­ing sec­ond thoughts.

“Su­per­mar­ket shop­ping cen­ters had been an at­trac­tive as­set class for us for a long time,” said Jeremy Starkey, pres­i­dent of com­mer­cial real es­tate fi­nance at the $8.4 bil­lion-as­set TowneBank.

“It’s not as at­trac­tive as it used to be,” he said.

Starkey and TowneBank have plenty of com­pany. Bankers at sev­eral other in­sti­tu­tions with big com­mer­cial real es­tate book have also de­cided to think twice about loans on strip cen­ters dom­i­nated by a large gro­cery store. There are too many warn­ing signs on the hori­zon, from the po­ten­tial for the sec­tor to be dis­rupted by Ama­zon’s pur­chase of Whole Foods to the ex­pan­sion of Ger­man dis­count re­tail­ers Aldi and Lidl.

“My opin­ion is that this prob­a­bly rep­re­sents a struc­tural change in terms of the in­ten­sity of on­line com­pe­ti­tion for gro­cery,” said Mike Wil­son, chief lend­ing of­fi­cer at the $4.3 bil­lion-as­set Bankers Trust Co. in Des Moines, Iowa.

It’s the lat­est sign of trou­ble in CRE lend­ing. Reg­u­la­tors have steadily is­sued warn­ings to banks that have high con­cen­tra­tions of CRE loans. The broader re­tail sec­tor has ex­pe­ri­enced a huge wave of bank­rupt­cies in re­cent months. And of­fice-build­ing-va­cancy rates have spiked in some mar­kets.

To be sure, the vast ma­jor­ity of CRE loans tied to su­per­mar­kets are per­form­ing, said Matt An­der­son, man­ag­ing direc­tor at the data provider Trepp. But dis­tress sig­nals have popped up among com­mer­cial mort­gage-backed se­cu­ri­ties that in­clude large loans an­chored by gro­cery stores.

Cred­its that were at least 90 days late as of Septem­ber in­cluded a $55 mil­lion loan on the Rose­mont Com­mons shop­ping cen­ter near Akron, Ohio, an­chored by a Giant Ea­gle shop­ping cen­ter, and a $40 mil­lion loan for a Price Chop­per-an­chored strip mall in Ver­non, Conn., ac­cord­ing to Trepp data.

Those types of delin­quen­cies should raise eye­brows among CRE lenders, An­der­son said.

“It makes you pause to con­sider that we’re in the midst of an ex­tended eco­nomic re­cov­ery, but we’re still see­ing these prob­lems,” An­der­son said. “There are new prob­lem loans show­ing up ev­ery month” on prop­er­ties tied to gro­cery stores, he said.

Be­cause of the na­ture of CMBS, it is im­pos­si­ble to de­ter­mine which banks are still on the hook for loans that have been se­cu­ri­tized. But if loans in­cluded in a se­cu­rity have be­come dis­tressed, it is a sure sign the same thing is hap­pen­ing to in­di­vid­ual CRE loans that regional and com­mu­nity banks hold on their port­fo­lios, An­der­son said.

TowneBank has de­cided to un­der­write and orig­i­nate such loans only for ex­ist­ing cus­tomers “that make sense on a case-by-case ba­sis,” Starkey said.

Bankers Trust holds about $1.3 bil­lion of non- owner- oc­cu­pied com­mer­cial real es­tate loans, the sub­cat­e­gory of CRE loans where banks typ­i­cally in­clude shop­ping cen­ter loans. How­ever, Bankers Trust does not have “sig­nif­i­cant ex­po­sure” to the su­per­mar­ket sec­tor be­cause “that is a very nar­row-mar­gin busi­ness that tends to be risky,” Wil­son said.

Profit mar­gins in the gro­cery busi­ness have gone from nar­row to ra­zor thin. Ear­lier this year, Kroger, the largest U.S. su­per­mar­ket chain, posted two con­sec­u­tive quar­ters of de­clin­ing same-store sales, its worst slump in more than a decade. Its profit mar­gin plunged be­low 1% in the sec­ond quar­ter.

Some su­per­mar­kets have shown even greater signs of stress. Marsh Su­per­mar­kets in In­di­anapo­lis filed for bank­ruptcy in May and closed all of its 44 stores this sum­mer.

Plenty of banks have orig­i­nated loans for ei­ther the de­vel­op­ment of gro­cery-an­chored shop­ping cen­ters or re­fi­nanced those loans. Gro­cery-an­chored real es­tate rep­re­sents the largest part of the re­tail loan port­fo­lio at the $22 bil­lion-as­set Ibe­ri­a­bank in Lafayette, La., Chief Risk Of­fi­cer Terry Akins said in a re­cent con­fer­ence call.

He did not break out spe­cific fig­ures, and banks are not re­quired to dis­close their ex­po­sure to the gro­cery sec­tor.

The $36 bil­lion-as­set East West Bank in Pasadena, Calif., is an ac­tive lender to gro­cery-an­chored shop­ping cen­ters. But East West be­lieves it ad­e­quately man­ages its risk be­cause many of its CRE loans are to devel­op­ments that serve eth­nic com­mu­ni­ties and which in­clude lots of small stores, which spread out the risk, Greg Guyett, chief op­er­at­ing of­fi­cer, said dur­ing a con­fer­ence call.

But a grow­ing num­ber of bankers seem to be tak­ing a stand­off­ish ap­proach to su­per­mar­kets and the en­tire re­tail sec­tor in gen­eral. Ap­par­ently, Ama­zon and on­line com­merce pose such a threat to tra­di­tional re­tail that many real es­tate lenders have de­cided to sit on the side­lines.

“The re­tail we do are in strip malls in Brook­lyn and Queens, maybe a small food store or restau­rants, where there’s a lot of walk-in traf­fic,” said John Bu­ran, CEO at Flush­ing Fi­nan­cial in Union­dale, N.Y.

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