The investors who funded the last great expansion in mall commerce — before digital shopping came on the scene and disrupted everything about the way people buy — are on the verge of loosing billions, according to reports in Reuters.
About $128 billion in commercial real estate loans — about a quarter of which went to building malls about ten years ago — are coming to due to refinance between the end of 2016 and 2017.
And that could soon be an issue for investors, as around $38 billion of those loans were bundled into commercial mortgage-backed securities (CMBS) and sold to institutional investors. The problem is that underwriters are estimating about half of all CMBS maturing in 2017 could struggle to get financing on current terms. Commercial mortgage debt often only pays off the interest and the principal must be refinanced.
Between the end of 2009 and today, e-commerce has at least doubled its share of the retail pie, but retail sales themselves have only increased about 31 percent. Some physical retailers have been hit harder than others — department stores have taken a particularly intense beating with a shared collective down 17 percent.
According to Howard Davidowitz, chairman of Davidowitz & Associates Inc, half the 1,100 U.S. regional malls will close over the next decade.
“When there is too much, and we have too much, then the only differentiator is price. That’s why they’re all going into bankruptcy and closing all these stores,” Davidowitz said.
Investor worries about exposure to struggling malls and retailers intensified in August when Macy’s said it would close 100 stores.
The weakness in physical retail has already taken something of an upfront toll on investors – CMBS issuance is half of what it was ten years ago, and brokers say the packaged debt financing is now only available to the nation’s most profitable malls. Investors, too, are demanding greater prudence in CMBS underwriting.
Mall owners who failed to meet debt payments in the past will just walk out, since their agreements tend to free them from having other assets tapped and they have little of their own money in on the deal.
“With the retail consolidation that we have ahead of us, malls have a fair amount of pain left to come,” Edward Dittmer, a CMBS analyst at Morningstar, said.