Why Today’s Retail Developers Need Equity Investors
In the current retail development landscape, the traditional model of relying purely on debt financing is facing serious challenges. Stubbornly high interest rates, lofty construction costs, and excess market supply have all made it increasingly difficult for retail developers to secure the capital needed to complete their projects or sign-up new ones.
As a result, equity investors and specialized 100 percent LTC lenders are becoming essential partners for merchant developers looking to bridge financing gaps, maintain strong tenant relationships, and ensure long-term viability.
Without the ability to utilize affordable construction debt at higher leverage points, developers are finding themselves needing to fill the capital stack gap with new equity sources. In an environment where tenants are still feeling the effects of economic volatility, developers cannot afford to delay or scale back their deliveries. By providing necessary funding, equity investors allow developers to continue with their projects and preserve the trust of their tenants—critical for sustaining both current and future opportunities.
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Equity investors who are willing to take on more risk in exchange for a higher return are becoming crucial in providing undercapitalized developers with the flexibility to move forward with their projects despite the constraints imposed by senior lenders.
Limited partner capital has largely dried up in the current environment, especially for smaller developers with sub-$10 million projects. Additionally, traditional preferred equity groups who invest $2 million to $10 million typically limit their exposure to 80 to 85 percent of the capital stack, in addition to needing higher fixed returns and fees instead of sharing in backend profits. That means developers are left to find the remaining equity themselves or seek additional financing partners.
In response to the limited availability of traditional financing sources, some developers are turning to 100 percent loan-to-cost financing providers. These lenders offer more aggressive debt structures that can cover the entire cost of development. These providers scrutinize tenant credit and profit spreads to mitigate risk which can create additional complexity for developers who rely on tenants with weaker credit profiles.
Another emerging source of capital comes from individual real estate investors who are providing passive capital in subordinate positions for the first time. These sponsors, who would otherwise be purchasing stabilized assets, are chasing yield in new ways. Although it takes connections to find and typically requires more handholding, high net worth individuals can provide developers with flexible capital at high leverage points to accomplish their goals.
The current retail development landscape presents numerous challenges—from rising interest rates and construction costs to limited access to traditional equity capital. As a result, retail developers are finding that new equity investors are no longer a luxury, but a necessity. By partnering with brokers to identify and utilize new capital sources, developers can bridge the financing gap, maintain strong tenant relationships, and move forward with their projects despite the tightening of conventional financing options. In this complex and increasingly competitive market, equity capital is key to ensuring the continued success and sustainability of retail development projects.
Jordan Yarosh, Debt & Equity, SRS Real Estate Partners.
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