Observers of the U.S. retail industry realize significant risk signals are showing up, in large part due to a shift in the way consumers shop for and purchase goods — namely the rise of e-commerce. The result has been increasing financial distress on traditional brick-and-mortar stores, most notably at large multistore regional malls. But how much do these at-risk signals extend to loans across the entire spectrum of retail assets?
While an October 2018 report from financial services firm Brown Brothers Harriman indicated that just 1.7 percent of outstanding CMBS loans for malls were tagged as distressed and while delinquencies for retail CMBS loans are on the decline, this doesn’t mitigate the fact that hundreds of loans for retail properties — CMBS and others — are distressed.
A June 2019 review of CrediFi data shows over 1,900 retail loans across the country were recognized as distressed, making it more likely that some borrowers may not be able to keep up with their financial obligations. Furthermore, CrediFi has begun tracking “at-risk signals” on other retail loans. Together, these loans cover a wide swath of the retail landscape: community centers, lifestyle centers, strip centers, neighborhood centers, factory outlets, super-regional malls and regional malls.
While certain types of retail properties are performing well — for instance, grocery-anchored centers remain very much in favor with investors and lenders — other types of retail properties are lagging, namely traditional malls. It should come as no surprise, then, that four of the 10 largest distressed retail loans in our review were associated with regional malls — malls that have been hit hard by retail bankruptcies.
One of those regional malls is The Shoppes at Buckland Hills in Manchester, Connecticut. Among the reasons that the mall’s $130 million CMBS refinance loan originated in March 2012 is likely to continue to be at risk is that the lease of troubled retailer Macy’s — which occupies 144,650 square feet (11% of GLA) and is the major tenant at the mall — expires less than two years from now, in March 2022.
Our review uncovered at-risk signals on loans at retail properties from coast to coast — states like Colorado, Illinois, Louisiana, Maryland, Montana, New York, Ohio, Pennsylvania, Texas and Washington, to name a few.
Although some malls are being repurposed and neighborhood and strip centers continue to do well overall, it looks as though we haven’t seen the end of distressed retail loans, particularly those connected to malls. The problem is that nearly 800 big-box anchors tenants remain vacant at U.S. malls, according to Forbes.com. Coresight Research estimates that store closure announcements in the U.S. could reach 12,000 by the end of 2019, more than double the number of announced closures in 2018.
Therefore, it is imperative for commercial financial professionals to actively monitor CMBS mall loans. The CMBS loans on regional and outlet malls that are coming due within the next several years could significantly jeopardize the retail lending environment and lead to millions in losses for lenders, owners, and investors. If lenders curtail their retail lending and liquidity dries up, it may become increasingly difficult for mall owners to sell their properties, even at rock-bottom prices. With no way out and values below balances, owners might start walking away from assets, leaving lenders with growing REO counts.
The good news is that unlike 2008, when there was little data and intelligence available until it was too late, there is now sufficient data and intelligence to make smart decisions before problems spin out of control. The challenge and opportunity for those in decision-making positions is to dig into available data and closely watch distressed loans.
Download our 2019 CRE Lending & Bank Risk report to learn more about the banking system’s exposure to retail lending.