INVESTMENT ANALYSIS
By Byron Smith Sr ., Esq ., CCIM , CRB
SURVIVING RETAIL IN TROUBLED TIMES
The COVID-19 pandemic has exacerbated and accelerated already challenging circumstances for shopping malls and their owners , but there may be other options for these beleaguered assets .
Although 2020 is now in our rearview
mirror , the impact of this turbulent year will be felt in the commercial real estate industry for years to come . While the industrial and apartment asset classes have navigated the COVID-19 pandemic relatively unscathed , the retail asset class has been battered by the pandemic . As the pandemic shuttered most of the U . S . economy in the second quarter of 2020 and caused retail sales to fall precipitously , many retailers were wounded . In some instances , those wounds were fatal , with as many as 25,000 stores expected to have closed in 2020 .
Considering the social and economic upheaval that has occurred since that initial shock , retailers have experienced a wide variation in performance . Grocery stores , dollar stores , and other essential retailers have survived , and in some cases thrived , as the pandemic has unfolded . However , department stores , apparel retailers , restaurants , and other similar purveyors of nonessential goods have struggled .
TROUBLE AT THE MALL American shopping malls faced significant adversity long before the coronavirus came to our shores . Amid the pandemic , those headwinds have only grown stronger . While department store sales have steadily declined in the past two decades , e-commerce sales have grown dramatically in the same time frame .
The closure in many areas of department stores like Sears , JCPenney , and Lord & Taylor along with retailers like Brooks Brothers and Forever 21 has created significant vacancy in shopping malls and placed tremendous financial pressure on shopping mall owners .
The Crystal Mall in Waterford , Conn ., is a classic example of the challenges faced
CMBS Delinquency Rate By Property Type (% 30 Days +)
Dec . 2020 Nov . 2020 Oct . 2020 3 Mos . 6 Mos . 12 Mos . Industrial 1.14 1.10 1.53 1.07 1.57 1.45 Lodging 19.80 19.66 19.43 22.94 24.30 1.53 Multifamily 2.75 3.11 2.95 2.80 3.29 2.00 Office 2.18 2.27 2.49 2.25 2.66 1.98 Retail 12.94 14.21 14.33 14.76 18.07 4.42
Source : Trepp today by many B-class and C-class shopping malls which constitute approximately 70 percent of all the malls in the country . If you include restaurants and other nontraditional retail outlets , Crystal Mall has the potential to house 80 retail tenants . In 2018 , Sears filed for bankruptcy and closed its anchor store there . This closure resulted in reduced customer traffic in the mall , which in turn hurt other retailers . Since the Sears bankruptcy filing , six other retailers in the mall have filed for bankruptcy including JCPenney , Neiman Marcus , Men ’ s Wearhouse , Forever 21 , and GNC . Retail industry experts project that there will be more retailers filing for bankruptcy protection in 2021 . As of this writing , 35 storefronts in the mall are currently vacant . Between the bankruptcies , store closures , and prior vacancies , 44 percent of the available store space in this mall is vacant . Will it survive ? The jury is still out , but it is doubtful . Is this the fate of similar B- and C-class shopping malls across the country ?
TROUBLED RETAIL ASSETS In order to understand the true magnitude of the troubled mall problem , it is instructive to examine the delinquency rate of retail commercial mortgage-backed securities ( CMBS ) since most retail shopping malls are financed with CMBS debt . As of December 2020 , 12.94 percent of all retail CMBS debt is more than 30 days delinquent .
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE WINTER 2021