rescue and surrender them to lenders. The dilemma is no easier for
lenders, who typically experience steep loses when they foreclose and
are faced with the decision to sell or refurbish.
Investors Pessimistic About Shopping Malls
The current gloom about shopping mall prospects is evident on Wall
Street, as equity and debt investors have soured on shopping center
investments, and the shares of shopping mall real estate investment
trusts (REITS) have fallen sharply in the past year. Figure 1 shows
how eight shopping mall REI TS have performed over the past year. The
declines have ranged from roughly 20% to more than 40%, with the
decline in share prices accelerating over the past six months.
Investors also are wary of commercial mortgage-backed loans
(CMBS) to shopping centers, due to their declining performance.
According to Morningstar Credit Ratings, as of Q4/16, approximately
$3.8 billion in shopping center loans were in default, representing
approximately 7.8% of the $48.6 billion market for such loans.
Beginning in the spring of 2017, hedge funds and other investors
began to increase their short positions against shopping center CMBS
loans. In Q1/17, traders bought a net $985 million in credit default
swaps that target the two riskiest types of CMBS, according to the
Depository Trust & Clearing Corp. That’s more than five times the
purchases in the prior three months. In September 2017, Fitch Ratings
also warned that Amazon’s increasing market share in apparel sales
could result in more retail CMBS defaults.
Investor concern with shopping center CMBS loans is understandable. In 2016, the dollar volume of CMBS defaults was up approximately 11% over 2015 levels, and shopping center loan foreclosures
have generated large losses for investors. According to Morningstar,
since 2010, there have been foreclosures on CMBS shopping mall loans
with a face value of $2.88 billion, with noteholders losing 74 cents on
the dollar. Recent shopping center CMBS loan liquidations are consistent with Morningstar’s research. In March 2017, a $62.7 million loan
on the Citadel Mall in Charleston, SC was foreclosed, with a total loss
on the property, and in August 2017, a $64 million loan on the Hilltop
Mall in Richmond, CA was foreclosed, resulting in a 78% loss.
Given the continuing and widespread weak- ness in the retail industry, investors’ focus has hifted to the real estate occupied by stores.
With substantial equity and debt capital invested in
retail real estate, investors have to wonder, are regional
shopping malls the next troubled asset class? The health
of shopping malls is closely tied to the health of the
retail industry, which faces multiple problems, including
the rise of electronic commerce, store closings, declining
pedestrian traffic, changes in consumption patterns and
weak consumer incomes. While these pressures are not
new, their combination is intensifying the pressure on
retailers, which in turn affects mall owners.
According to the International Council of Shopping
Centers, there are approximately 1,200 regional malls
in the U.S. Earlier this year, Credit Suisse published a
report stating that as many as 300 malls are likely to
close within the next five years, while other analysts
have suggested as many as half of all existing malls
will close. Some industry observers are less pessimistic,
arguing that the shopping mall industry is bifurcating
into a group of high performance properties, which will
continue to perform well, and that the industry’s problems are confined to the weakest malls. Facing these
challenges, mall owners must make difficult choices
and adapt their properties to the changing retail environment or accept that some properties may be beyond
The Retail Crisis:
Impact on Regional Shopping Malls
BY STEPHEN B. SELBST
As brick-and-mortar retailers scramble to increase their online presence while fending off bankruptcy,
regional shopping malls struggle to fill empty spaces and replace anchor stores. Stephen Selbst examines
the issues lenders and investors are facing as this iconic part of U.S. life tries to reinvent itself.
Retailers that file for bankruptcy have been particularly active in
S TEPHEN B. SELBS T
closing stores. Few retailers reorganize under the Bankruptcy
Code; most often they are either liquidated or sold to new owners.
But even when retailers are sold as going concerns, they use the
Bankruptcy Code to reject unprofitable store leases.