As a wave of bankruptcies continues to roll through retail, the malls that house those now-defunct stores are finding the going increasingly rough. And for some landlords, the best solution seems to be just walking away entirely. Apparently, the long-run financials for many mall owners indicate that just giving up and leaving ownership with their lenders is now a better option than trying to restructure their debt and persevere with a failing retail model.
In the period from Jan.–Nov. 2016, 314 loans secured by retail property were liquidated, an 11 percent increase from the same time a year earlier, according to data from Morningstar Credit Ratings.
“We’re seeing a boatload of these kinds of properties coming to market,” said James Hull, managing principal of Hull Property Group, which purchased five malls from foreclosure sales in 2016. “There have been some draconian losses for the enclosed mall business.”
As property value sinks below the balance of the loan, even some very big-time operators are choosing default as a strategy. Mall giant Simon Property Group early last year defaulted on a loan that was secured by Greendale Mall in Worcester, Mass., which was then foreclosed on. Washington Prime Group has confirmed that it is considering turning two malls back to its lenders, mostly bondholders who hold the mortgages that have been bundled into securities.
One mall owner who returned a property to its lenders cited falling foot traffic combined with the fact that rehabilitation projects are costly and easily stymied by red tape.
“Delays, including the city approval process, held up the project past the point of what would have allowed for us to successfully complete it,” he said. “As a result, we decided that the best course of action for all parties would be to return the property to the lender and allow the city to execute their plans with new owners at their own pace.”
And 2017 is looking like it could be another tough one for mall operators. The Limited is bankrupt and closing all of its stores; Sears and Macy’s are both closing massive amounts of stores.
“We don’t have a favorable outlook for secondary and tertiary malls with weaker sales. We look at them with a high degree of skepticism,” said Eric Thompson, senior managing director at Kroll Bond Rating Agency.
As for the operators themselves, most have not seen a hit to their credit ratings as a result of the walk-aways and often chose to forfeit on loans rather than restructure in response to shareholder pressure to shore up the balance sheet.