RED Development and KeyBank: A Client Conversation
E-commerce disruption. The global financial crisis. Consolidation and transformation. The retail industry has seen it all over the past two decades. As it has recalibrated to serve rapidly-changing consumer demands, retail property ownership has shifted from local to global, now dominated by large owner-operators and real estate investment trusts (REITs).
During that same time, KeyBank Real Estate Capital and RED Development have navigated the changes together. KeyBank teams have served as the trusted investment advisor and lender to the Phoenix-based commercial real estate firm, a privately-held institutional-quality owner/operator with a portfolio of 34 retail, commercial and mixed-used properties totaling nearly 17 million square feet across 11 states.
At the recent International Council of Shopping Centers (ICSC) RECon, we sat down with Mike Ebert, managing partner of RED Development, LLC., to discuss how the two organizations work together to make deals happen.
With its roots in development, RED has grown and adapted its key competencies to include ongoing management and acquisition of existing properties – a growing and thriving niche. A partner of choice for national retailers, real estate investors and property owners, RED’s teams excel at maximizing asset value and performance. At the heart of its success is a focus on relationship-building – an attribute they have in common with Key, and one that’s been the platform for mutual success.
1998 – 2018: South Pointe, A First and Enduring Deal
The South Pointe shopping center in Lincoln, Nebraska demonstrates the evolution of retail real estate finance. Key provided a construction loan to develop the property. After it was built and leased, Key then refinanced the property with commercial mortgage-backed securities (CMBS) and, when that matured, a second CMBS issuance. In 2018, Key refinanced the same property again, this time on the balance sheet. RED then purchased the adjoining shopping center, and is undertaking an $80 million expansion and redevelopment to accommodate new anchor tenant, Scheels, a sporting goods and entertainment retail chain.
The 20-year longevity between owner, lender and property is virtually unheard of in this business. The flexibility of Key’s platform to provide construction, CMBS, and on-book lending allowed this asset to be successfully managed and grown with the same partners who got it off the ground—bringing the right financial packages to the table, at the right time for the market cycle and RED’s needs.
Stepping up, Regardless of Market Cycle
In real estate finance, retail is viewed by many as volatile and highly cyclical. Many capital providers of either debt or equity investment experience equally volatile fluctuations in their ability and willingness to do deals, citing the market cycle and their own risk-and-reward balance. RED’s Ebert credits Key with securing financing even in the most challenging of financing markets.
For the company’s Cityscape multi-use development in Phoenix, Key provided the land acquisition financing in March 2006 and provided bridge financing for additional site work in 2007. In 2008, amid a recession that would become the global financial crisis, Key led the syndication, arranging meetings with more than 70 banks during the holiday season, eventually securing seven syndication participants despite going to market during one of the darkest hours in real estate finance history. When the project was completed, it was 90 percent leased and was later successfully refinanced.
Redeveloping for the Changing Retail Landscape
The retail sector’s difficulty with addressing the exponential growth of online shopping and changing consumer behaviors has left many traditional shopping center owners and managers dealing with loss of anchor tenants, increased vacancies, and decreased foot traffic.
But, Ebert points out that this turbulence creates opportunity for retail real estate buyers. RED Development has been actively pursuing acquisitions, with an eye toward redeveloping properties that are the “right real estate with the wrong owner” or the “right real estate with the wrong business plan.”
He says this era of retail real estate is focused on the operator. Operators who are adapting to meet consumers’ needs are shifting shopping centers to be more dining and entertainment-driven and to draw retailers that are focused on health and wellness. Boutique fitness chains, such as OrangeTheory and Cyclebar, and beauty stores such as Sephora and Ulta are bringing in new shoppers who eschewed department store or big box stores.
Redeveloping centers to improve the flow of pedestrian traffic and feature outdoor dining or patio seating also adds to the experience. The goal is to implement a business plan that brings Baby Boomers back to retail centers and gets Millennials to embrace them.
Relationships Matter: RED and Key
In some long-standing business relationships, predictability would be a downside, but for RED Development’s relationship with Key, it has been the secret to success. RED Development can bring Key into deals early, with the knowledge gained over decades of collaboration about the company’s goals and what makes a good deal.Over the 20-year relationship, Key has provided financing exceeding $1.8 billion, across products including construction, acquisition, and permanent financing, syndicated loans, public financing, debt funds and other capital markets executions. With its strong advisory relationship with Key, RED is poised to rise to the challenges and seize the opportunities in retail real estate in 2018 and into the future.
For more information, contact: KeyBank Regional Executive Dave Paisley at David_C_Paisley@KeyBank.com.