With Weaker Malls ‘In the Crosshairs,’ Retailers Stress Fundamentals
Amid bleak news about the future of shopping malls-Fitch Ratings, New York, is the latest ratings agency to cite malls’ ongoing struggles-retailers are stressing what they do best to stay relevant.
Retail is the second-largest property type in the U.S., Fitch said, with 22 percent of total collateral. The much aligned shopping mall encompasses more than one-third of that percentage (7.6 percent of overall commercial mortgage-backed securities collateral). The rest of retail collateral consists of grocery anchored strip centers, large box retail and urban retail.
Trepp, New York, said the recent wave of firms that have failed to stay afloat includes The Limited, Payless ShoeSource, hhgregg, Rue21, Gordmans, Gander Mountain, Wet Seal and MC Sports. Big box retailers such as JCPenney, Macy’s, Sears and Kmart have continue to close stores this year. Morningstar, New York, said the Rue21 bankruptcy alone could put nearly $101 million in CMBS at risk.
Trepp, in its May Retail Sector Research Report, noted brick-and-mortar retail continues to be disrupted by technologies that offer “convenient online purchasing channels, engaging experiences with consumers and lightning-fast production time to keep pace with millennial trends.”
“Although this mass adoption of technology affords retailers the opportunity to innovate and create new streams of profit, it has rendered the business models of some less-agile retailers obsolete,” Trepp said. “As a result, a wave of retailers have filed for bankruptcy, and big box firms have continued to close stores.”
The mall subsector has been the segment most impacted by the recent slew of closures, Trepp said, as many have struggled over the past few years due to the underperformance of department store anchor tenants.
“The closures are now leaving many malls and shopping centers with large vacancies that may be difficult to backfill,” Trepp said. “The repercussions of this turmoil on the CMBS market include a rising delinquency rate for retail loans, as well as elevated loss severity in recent years. To boot, the wall of maturities has placed further pressure on the CMBS sector, especially retail debt.”
Despite this less-than stellar assessment, Trepp said although a significant amount of real estate is impacted by retail bankruptcies and closures, the sector has robust fundamentals that encourage future sales growth.
“U.S. consumer confidence and spending is on the rise, and the GDP has increased for eight straight years,” Trepp said. “Unemployment is also extremely low and remains under 5%.”
JLL, Chicago, said net absorption for U.S. retail space in 2016 was still positive at 105.7 million square feet, despite the 41.4 million square feet impacted by store closures. “This implies that other retailers-such as specialty stores and restaurants–are performing well enough to offset some of the shortfalls from mall turnover.”
Meanwhile, Fitch, in its U.S. CMBS Retail Exposure Bears Scrutiny’ report, warned ongoing struggles of shopping malls throughout the country could put some pressure on some U.S. CMBS deals that came to market between 2011 and 2013.
“Retailers like Sears, JC Penney and Macy’s are still facing headwinds, which will translate to fewer stores and smaller footprints,’ said Fitch Managing Director Huxley Somerville. “This will mean weaker malls will disappear and the remaining malls, offering a solid mix of retail, restaurants and entertainment, will be strong
Fitch reported its CMBS group has been making qualitative adjustments for riskier malls since 2013. Since then, any mall included in a new CMBS deal rated by Fitch is subject to heightened credit enhancement.
Two positives, however, will help stem pressure on retail CMBS loans over time, Somerville said. “Exposure to weaker malls in CMBS 2.0 multiborrower CMBS has dropped off since 2013,” he said. “Additionally, a lack of new development, especially new malls, combined with increasing population growth and the closure of weak properties, should help right-size retail square footage and support the property type despite e-commerce’s continued growth.”
