Anchor Store Closings Will Hurt Mall CMBS

Shopping malls are facing major problems, with one analyst predicting more than half of the shopping malls across the country will either shutter their doors or struggle during the next few years.

According to the report, shopping malls are getting hurt by online competition, with online sales growing 22 percent in 2016 to $3.34 billion. Meanwhile, sales at physical stores declined five percent during the same period.

If a slew of malls do close, investors, who back loans to the shopping malls in the form of commercial mortgage-backed securities, otherwise known as CMBS, will be greatly affected. According to the report, when an anchor tenant in a shopping mall decides to leave the mall complex, all the loans for the mall can be thrown into peril.

The report highlighted JCPenney, which announced plans to shut 140 stores. Morningstar Credit Ratings looked at 39 locations that the firm thought would close and discovered that roughly $7.3 billion in loans that are backed by the mall real estate could be hurt by the JCPenney closings.

But it’s not just malls with JCPenney as an anchor that will suffer. Macy’s and Sears have also announced plans to close stores inside mall complexes. Take the closing of JCPenney and Macy’s at the Hudson Valley Mall located in upstate New York as an example: within a year both stores closed, an event which has had a negative impact on the mall.

“The January disposition of the 765,465-square-foot mall in Kingston, New York, resulted in $9.4 million of proceeds, representing an 89.2 percent discount to the original appraised value, and resulting in an 86.1 percent loss severity,” Morningstar stated. The ratings agency estimates about $48 billion in loans backed by malls may default.