Loan payment dues from the recession era borrowing binge of the last decade are coming back to haunt the withering malls in America.
One such case is that of the Detroit-based Lakeside Mall that has defaulted on a $144 million loan payment. The property is operated by the second largest U.S. mall owner, General Growth Properties Inc. It's being speculated that Lakeside's default on loan payment is likely to presage a string of missed loan payments by malls across the U.S. as most of them struggle to keep up with growing competition from eCommerce players.
“For many years, people thought the retail business in the U.S. was a bit overbuilt,” said Tad Philipp, an analyst at Moody’s Investors Service. “The advent of online shopping is kind of accelerating the separation of winners and losers.”
In the next 18 months, about $47.5 billion of retail property loans are set to mature, according to Bank of America Merrill Lynch. With declining foot traffic and store occupancy, chances of major loan repayments are turning bleak. To make matters worse, it's increasingly getting difficult to seek commercial-mortgage backed securities that could finance such malls, Bloomberg reported.
“The criteria to get financing is getting a little bit more stringent and cutting off the lifelines for some of these malls,” said DJ Busch, a senior analyst at Green Street.
Even refinancing malls with declining sales is getting difficult. With more malls, offices and hotels defaulting on CMB loans, over $1 billion are already due in mortgage payments. The situation is likely to get worse as the recession era loans are unlikely to get refinanced with stricter loan underwriting in practice today.
“In 2006 or 2007, everything was beautiful,” said RBC Capital Analyst Rich Moore. In today's environment, “if you got to a bank and you want to refinance junk, the bank says 'no.'”
This has led some mall companies to push for asset liquidation, General Growth being one of them. According to Bloomberg, General Growth segregated its low-performing properties and placed them under a new company that that could oversee their liquidation.
But even liquidating such assets is proving to be a challenge. Often walking away from a poorly performing mall is the best choice for mall owners, especially if the debt on the property is greater than its value, Greet Street senior analyst DJ Busch told Bloomberg.
“It takes a lot of hope and a lot of capital to reinvent a mall that’s already somewhat uncompetitive in its market,” Busch said.