Mall Outlook Darkens as Online Sales Surge – CoStar


Mounting Headwinds Could Widen Gap in Property, Loan Performance Between Classes of Shopping Centers

A couple of the more than 2,200 numbers buried deep in this month’s Census Bureau report on retail sales may add to mounting concerns for U.S. shopping mall investors about the growing threat from e-commerce.

The report shows that for the first time, nonstore retail sales, which include e-commerce sales, totaled more than those for the department stores that anchor most traditional Class B and Class C malls.

Nonstore retail sales in February, the most recent month reported, totaled $59.77 billion. E-commerce sales account for about 88% of that volume.

The total for general merchandise retailers, the category that includes department stores, totaled $59.74 billion. Ten years ago, general merchandise store sales outpaced nonstore sales by 47%.

The figures contribute more gust to the intensifying headwinds for shopping mall investors, whether they be property owners, lenders or real estate investment trust and commercial mortgage investors.

“Class B and C malls, in particular, are driving weaker loan performance as they generally have less favorable locations, weaker anchor profiles and are particularly vulnerable to competition, both from other malls and internet sales,” Fitch analysts said in a recent report. “Losses of foot traffic and sales have led to additional store closures with increasing mall vacancies affecting property-level cash flow, thus putting pressure on loan performance.”

The list of general merchandise anchor retailers closing stores keeps growing. Specialty Retail Shops Holding Co., the parent of Shopko, called it quits last month, closing 360 stores. J.C. Penney has announced two rounds of closings this year with more anticipated. HBC opted to close up to 20 Saks Off Fifth Stores in February.

Overall, there have been more than 5,800 store closings reported this year. That elevated level of closings could lead to a widening gap in performance between property owners with more Class A malls than those with more Class B and Class C malls, Morgan Stanley & Co. analysts reported this week in their outlook for upcoming REIT first-quarter earnings results.

“Our same-store NOI [net operating income] growth of 2.1% is in line with 2018’s growth, but with the impact of the more than 5,800 store closures announced this year we expect to see a divergence between the haves and have nots,” Morgan Stanley research analysts noted.

That bodes well for Simon Property Group, the nation’s largest retail REIT with a high concentration of Class A malls. Morgan Stanley said it expects Simon to beat the 2.1% net operating income growth.

Morgan Stanley, however, is more cautious on some retail REITs.

“At this time last year, there was talk of ‘green shoots’ in the leasing environment following a relatively benign retail bankruptcy season. Fast forward to today and the elevated level of closures has put retail rationalization discussions back on the table,” Morgan Stanley analysts said.

In the longer-view outlook, credit rating agencies have been cautioning mortgage bond investors on the increased potential for losses on loans secured by malls.

Store closings as part of J.C. Penney’s turnaround plan will keep the pressure on U.S. REITs and commercial mortgage-backed securities to mitigate their exposure to associated risks, Moody’s Investors Service reported this month. These risks will vary according to a variety of factors, including the quality of the malls in which the stores are located.

“We anticipate J.C. Penney will continue to rationalize its store base as it works to improve store productivity,” said Christina Boni, a Moody’s vice president, and senior credit officer. “Even after announced store closings, the company will have a larger footprint than many of its competitors, while sales per square foot are well below those of peers.”

CMBS risk appears manageable, Boni said. Malls with multiple vacant anchor stores and a J.C. Penney account for just 0.5% of Moody’s-rated CMBS, while more than half of rated malls that include a J.C. Penney have no vacant anchors.

Moody’s-rated mall REITS have much larger exposure to J.C. Penney, though. Although the company accounts for an average of only 0.81% of rated mall REITs’ minimum base rent, this exposure represents an average of 8.4% of their total leasable area.

Mall REITs, however, have gradually reduced their exposure to stressed anchors as they redevelop the shopping complexes, which should enable mall operators to absorb additional J.C. Penney store closings, Moody’s said.

Credit rating firm Fitch Ratings has identified 72 loans totaling approximately $8.2 billion secured by regional mall and outlet properties in Fitch-rated U.S. CMBS conduit transactions from the 2010 through 2012 vintages that mature over the next three years, prior to the end of 2022.

Fitch has considered retail, particularly Class B and Class C malls, as a concern for quite some time. While not all of the loans are currently underperforming, many may have difficulty refinancing because of scarcer liquidity, the agency said.

Of the 72 loans maturing over the next three years, Fitch has already applied loss scenarios to 48 loans reflecting their weaker performance trends.

Article by:

MARK HESCHMEYER | CoStar
APRIL 11, 2019|