News feed - All Retail
Still today in March of 2021, the great unknown is what will the property market look like in 24-months (2023) (hopefully well clear to the current pandemic but more that that there will be a stability that is predictable) The six-million dollar question is will the market recover to 2019 levels or will there be a new normal? It's way to early to say, but if the 2008-09 recession was a yardstick, normality of sorts will occur. There has been plenty of hick-ups along the way, the Savings and Loan crisis, the Dot.Com bubble burst, 2008, and now the Coronavirus, and normality of sorts followed all of these events.
Was there even a normal in 2019. Alan Greenspan coined the term “irrational exuberance.” What were we really looking at before the pandemic? I don’t think we actually know yet. But developing a Capitalization Rate mathematically for some transactions did lead us to the opinion that cash payers like REITs had indeed lost their way and while there was an annual return on their investments, the return of their investment meant that another buyer had to be found to take their potentially negative position. Was there some “irrational exuberance.” going on? The economists I believe will eventually answer that question in the afirmative.
For Class-B Malls, The Future's Uncertain And The End Is Always Near
Dees Stribling May 25, 2021 Bisnow National
Now that the worst of the coronavirus pandemic appears to be over, U.S. Class-B and lower malls are finding their new normal as well, which happens to be much the same as before. More closures, significant erosions in value and new owners looking for the best ways to redevelop the sites, which don't necessarily include retail uses, mark the property type.
Redevelopment into industrial or other uses will be the salvation of only a fraction of dying Class-B malls in the years ahead, retail investment experts say. The real risk in the sector now is that some former malls face years in commercial real estate limbo: not fit for retail — or much else, either.
"We have to split the Class-B malls into buckets," Bloomberg Intelligence Senior E-commerce Analyst Poonam Goyal said. "There are probably about 250 malls that would be considered B malls right now. Do we need all 250 of them? The answer to that question is no."
The pressure on Class-B and lower malls in the 2020s is going to be relentless, Goyal said. E-commerce will continue to grow, especially in the form of social commerce.
"The ability to buy on Facebook, Instagram, YouTube and other image-based platforms is going to become much more prevalent in the next five years, adding even more to e-commerce growth," Goyal said. "There's simply going to be no place for a lot of Class-B malls."
Just how many will remain is up for debate, but it isn't a rosy picture for many lower-level malls keeping their shape and function. CBRE Research predicts the contraction of as much as 20% in total U.S. retail space by 2025, with most of the drop coming from the closure of Class-B and Class-C malls.
Mall valuation continued to drop during the pandemic, with Class-B and lower-quality properties decidedly feeling the worst pain, especially those malls in secondary and tertiary markets, DBRS Morningstar reports. Higher-quality properties, on the other hand, are able to make capital investments to broaden their post-pandemic appeal.
Only a few mall loans have been transferred to special servicers since the beginning of the pandemic (nine out of 150 from the 2017-2020 vintage), DBRS Morningstar reports. But their collateral still saw significant value declines, dropping an average of 48% compared with issuance during the pandemic.
Value declines have been even more pronounced for loans originated during 2013-2016, averaging a 60.1% drop. That is because the 2017-2020 loans were underwritten with an average loan-to-value ratio of under 45%, compared with 54% for the older loans.
Closures will continue to impact valuations. The Square One Mall in Saugus, in metro Boston, saw its valuation drop from $201M at the time of its CMBS loan's securitization in 2012 to $50.5M in early 2021. The Dover Mall in Delaware, valued at $129M in 2011, was valued at $41M in February, and The Mall at Tuttle Crossing in Dublin, Ohio, saw a 2011 valuation of $240M dwindle to $80M only a decade later.
Closing anchors is the main ongoing risk for mall values, Green Street reports, estimating that about 360 mall-associated department stores have closed since 2016. About half of remaining mall-anchoring department stores are doomed to close by the end of 2025, the company predicts, many of them anchoring Class-B properties.
Despite grim prospects, there is a post-pandemic investment market for Class-B malls. After reductions in valuations, some of them do have a future as retail of some kind, depending on local market factors.
"Class-B malls have been selling year after year as REITs unload their noncore assets and lenders who have taken them back have been selling assets," said Newmark Vice Chairman Thomas Dobrowski, a specialist in brokering enclosed Class-B mall assets as well as open-air and outlet centers.
"With the pandemic, there was a pretty significant drop-off in velocity last year, but there were Class-B sales in 2020, mostly assets earmarked to be sold pre-pandemic," he said. "Now, in 2021, we're seeing an uptick in activity."
In "normal" times, somewhere between 20 and 30 malls trade a year throughout the United States, Dobrowski said, making the trades relatively easy to track.
"This year so far, I'd say about half a dozen Class-B and below malls have been brought to the market, and we were responsible for the sale of the three of them," Dobrowski said.
In February, Newmark brokered the sale of the 862K SF Centre at Salisbury in Salisbury, Maryland, on behalf of Brookfield in a short sale.
"We were selling it with approval from the lender," Dobrowski said. "That mall had a lot of the issues that a lot of other malls have, especially the loss of anchors, and it frankly wasn't worth the loan amount, so the sales price reflected that."
Investors considered the mall viable as retail, just not worth its previous valuation, Dobrowski said. That isn't an unusual scenario: Class-B malls are trading, but at a price that needed to be reset.
"They're being purchased to be run as going-concern malls, but valuations are being taken down to a level where the new owners can sustain tenancy, lease up space and deploy capital to turn the asset around," he said.
"We have to split the Class-B malls into buckets," Bloomberg Intelligence Senior E-commerce Analyst Poonam Goyal said. "There are probably about 250 malls that would be considered B malls right now. Do we need all 250 of them? The answer to that question is no."
The pressure on Class-B and lower malls in the 2020s is going to be relentless, Goyal said. E-commerce will continue to grow, especially in the form of social commerce.
"The ability to buy on Facebook, Instagram, YouTube and other image-based platforms is going to become much more prevalent in the next five years, adding even more to e-commerce growth," Goyal said. "There's simply going to be no place for a lot of Class-B malls."
Just how many will remain is up for debate, but it isn't a rosy picture for many lower-level malls keeping their shape and function. CBRE Research predicts the contraction of as much as 20% in total U.S. retail space by 2025, with most of the drop coming from the closure of Class-B and Class-C malls.
Mall valuation continued to drop during the pandemic, with Class-B and lower-quality properties decidedly feeling the worst pain, especially those malls in secondary and tertiary markets, DBRS Morningstar reports. Higher-quality properties, on the other hand, are able to make capital investments to broaden their post-pandemic appeal.
Only a few mall loans have been transferred to special servicers since the beginning of the pandemic (nine out of 150 from the 2017-2020 vintage), DBRS Morningstar reports. But their collateral still saw significant value declines, dropping an average of 48% compared with issuance during the pandemic.
Value declines have been even more pronounced for loans originated during 2013-2016, averaging a 60.1% drop. That is because the 2017-2020 loans were underwritten with an average loan-to-value ratio of under 45%, compared with 54% for the older loans.
Closures will continue to impact valuations. The Square One Mall in Saugus, in metro Boston, saw its valuation drop from $201M at the time of its CMBS loan's securitization in 2012 to $50.5M in early 2021. The Dover Mall in Delaware, valued at $129M in 2011, was valued at $41M in February, and The Mall at Tuttle Crossing in Dublin, Ohio, saw a 2011 valuation of $240M dwindle to $80M only a decade later.
Closing anchors is the main ongoing risk for mall values, Green Street reports, estimating that about 360 mall-associated department stores have closed since 2016. About half of remaining mall-anchoring department stores are doomed to close by the end of 2025, the company predicts, many of them anchoring Class-B properties.
Despite grim prospects, there is a post-pandemic investment market for Class-B malls. After reductions in valuations, some of them do have a future as retail of some kind, depending on local market factors.
"Class-B malls have been selling year after year as REITs unload their noncore assets and lenders who have taken them back have been selling assets," said Newmark Vice Chairman Thomas Dobrowski, a specialist in brokering enclosed Class-B mall assets as well as open-air and outlet centers.
"With the pandemic, there was a pretty significant drop-off in velocity last year, but there were Class-B sales in 2020, mostly assets earmarked to be sold pre-pandemic," he said. "Now, in 2021, we're seeing an uptick in activity."
In "normal" times, somewhere between 20 and 30 malls trade a year throughout the United States, Dobrowski said, making the trades relatively easy to track.
"This year so far, I'd say about half a dozen Class-B and below malls have been brought to the market, and we were responsible for the sale of the three of them," Dobrowski said
In February, Newmark brokered the sale of the 862K SF Centre at Salisbury in Salisbury, Maryland, on behalf of Brookfield in a short sale.
"We were selling it with approval from the lender," Dobrowski said. "That mall had a lot of the issues that a lot of other malls have, especially the loss of anchors, and it frankly wasn't worth the loan amount, so the sales price reflected that."
Investors considered the mall viable as retail, just not worth its previous valuation, Dobrowski said. That isn't an unusual scenario: Class-B malls are trading, but at a price that needed to be reset.
"They're being purchased to be run as going-concern malls, but valuations are being taken down to a level where the new owners can sustain tenancy, lease up space and deploy capital to turn the asset around," he said.
Tumbling Values Underscore Quality Gap Among Regional Malls
Steven Jellinek May 25, 2021 DBRS Morningstar
Erin Stafford Dominion Bond Rating Service - Morningstar
Shopping malls have seen a lot of upheaval in the 30 years since reaching their peak in the early 1990s: the dot-com boom and bust, the 9/11 terrorist attacks, the 2008 Great Financial Crisis, and the rise of big box stores and e-commerce. Coronavirus dimmed the prospects of many regional malls more than any other factor. Shift to online shopping, rise of hypermarket, decline in department stores, changing shopping habits, e-commerce sales and an overabundance of retail space. Many mall operators are still battling problems that existed before the pandemic, including changing consumer behavior, etc. DBRS Morningstar has been evaluating the impact of these trends for transactions within its rated CMBS book.
Once vaunted by Consumer Reports as one of the top 50 wonders that revolutionized the lives of consumers, shopping malls have seen a lot of upheaval in the 30 years since reaching their peak in the early 1990s: the dot-com boom and bust, the 9/11 terrorist attacks, the 2008 Great Financial Crisis, and the rise of big box stores and e-commerce. But the Coronavirus Disease (COVID-19) pandemic is the accelerant thrown on a slow-burning fire and has dimmed the prospects of many regional malls more than any other factor, as the average value on troubled mall assets backing loans in commercial mortgage-backed securities (CMBS) tumbled more than 60% since the beginning of the pandemic, after being reappraised because of payment delinquencies, defaults, or foreclosures. These updated appraisals wiped more than $7.9 billion in value from 77 specially serviced mall properties backing $8.47 billion in loans packaged in CMBS.
While that's a staggering number and suggests that, on a national level, the mall landscape still has more suffering ahead, some factors suggest that the struggles will not be equal. Class A malls are more likely to skirt the worst of the turmoil, thanks to the investments their owners are pumping into their properties. In addition, more recently issued CMBS aren't feeling as much pain even as some investors and lenders shy away from the property type amid bankruptcy filings, store closures, and stiff rivalry from online competitors.
The State of the Mall
The shift to online shopping, the rise of hypermarkets like Target and warehouse clubs like BJ's and Costco, and the decline in department stores were already precipitating the phasing out or rightsizing of the mall concept. Changing shopping habits brought on by the pandemic only accelerated the trend. According to census.gov, total e-commerce sales for 2020 were estimated at $791.7 billion, or 14.0% of total sales for the year, an increase of 32.4% from 2019 when e-commerce sales comprised 11.0% of total sales. In addition, the United States is suffering from an overabundance of retail space. According to data from icsc.org, a shopping-center trade group website, the U.S. has 22.9 square feet (sf) of retail space per person, compared with 16.8 sf in Canada and 11.2 sf in Australia, the next two highest.
All malls aren’t feeling the pain equally, however. We note that lower-quality assets, especially those in secondary and tertiary markets, are losing tenants and cash flow, while owners of properties in the upper-quality tier are investing in their properties to broaden their appeal. However, the economic effects of the coronavirus pandemic have taken a toll on even the best malls. Simon Property Group (Simon), the dominant public player in the top-quality Class A mall space, doesn't expect to stabilize its net operating income, which is roughly 12% lower than pre-pandemic levels, until 2022 and has walked away from underperforming assets.
As retailers shrink their footprints amid the competition of e-commerce, consumers are shifting to more local shopping and moving away from malls. The pandemic has only hastened the fall of several retailers, which have faced dwindling sales and growing debt over the past few years as consumer preferences changed. In fact, a slew of department stores filed for bankruptcy in 2020, beginning with J.C. Penney, Neiman Marcus, and Stage Stores, followed by Century 21, Stein Mart, and Lord & Taylor. While the pandemic expedited the demise of many mall stalwarts, we believe that most of these large- scale tenant bankruptcies would have occurred in the next few years, even without the pandemic, because of outdated business models.
In an acceleration of pre-coronavirus trends, Nordstrom, which spent the past several years investing in and updating its online platform that now accounts for about one third of sales, is expanding its discount Nordstrom Rack chain to reduce its reliance on its department stores and to get a bigger chunk of the exploding off-price market. The company is not immune from permanent store closures, though. It recently announced it was closing 16 of its 116 department store locations, the first large-scale store closing campaign in its 119-year history, and is focusing its presence in top-tier Class A malls. Other noteworthy department store chains that have managed to stay above the fray include private family- owned Von Maur and Boscov's.
CMBS Troubled Mall Exposure
With the increase in CMBS loan defaults brought on by the pandemic, the portion of mall-backed loans seeking relief and in special servicing shot up to about 25% from just 5% at the beginning of 2020. Those loans have a balance of $13.47 billion backed by 165 properties, up from $2.89 billion on 39 properties in January 2020. Balance sheet lenders and insurance companies have become increasingly wary of the property type, leaving few viable options other than CMBS financing, which has been less and less available in recent years as traffic declines at regional malls and bond investors are less willing to take on the risks with the property type.
Acquisition and lending volume have declined. Issuance of mall-backed loans between 2017 and 2020 fell by nearly 60% compared with the 2013–16 period. These more recent loans were more conservatively underwritten as originators focused on premium assets with strong sponsorship and superior locations. In a sign that malls in more recent deals may be holding up better, the collateral on only seven properties backing six loans were reappraised since the pandemic began in April 2020, compared with 37 properties backing 46 loans from the 2013–16 group.
Even as fewer mall loans were transferred to the special servicer since the beginning of the pandemic, just nine out of 150 from the 2017–20 vintage, their collateral still saw hefty value declines, dropping an average of 48.0% compared with issuance. In contrast, value declines have been even more dramatic for the 2013–16 vintage, averaging a 60.1% decline. The 2017–20 loans were underwritten more conservatively with an average loan-to-value ratio (LTV) of under 45%, compared with 54% for the older group, and had a higher underwritten debt yield of 13.1% compared with 11.3% for the 2013–16 loans. They were also in more densely populated areas, boasting a DBRS Morningstar Market Rank average of 4.1 versus 3.5. The DBRS Morningstar Market Rank scale ranges from 1 to 8, with a DBRS Morningstar Market Rank of 1 indicating the least dense, most rural markets and a DBRS Morningstar Market Rank of 8 designating the densest, most liquid markets.
Looking at value declines by market rank, loans backed by collateral in rural, tertiary, and secondary markets (DBRS Morningstar Ranks of 1–4) experienced the worst value declines. As displayed in Exhibit 2, malls in these markets have the harshest outlooks, collectively representing nearly 90% of the total value decline.
The most vulnerable lower-quality Class B and C malls are at a higher risk than ever for obsolescence and some are being sought out for alternative use. While converting some malls to alternative uses will likely become commonplace, Class A mall owners will likely add nonretail components to their malls, diversifying their revenue stream. Demographics favor Class A malls with a higher DBRS Morningstar Market Rank, those in primary markets with higher density, over Class B/C malls in less dense secondary and tertiary markets, which should boost demand for both retail and nonretail uses over the long term.
Palisades Center
The Palisades Center loan, in which 1.9 million sf of a 2.2-million-sf mall about 20 miles north of New York City secures a $418.5 million loan in PCT 2016-PLSD (not rated by DBRS Morningstar), faces an extended October maturity. At issuance, the loan's metrics were favorable with an 11.5% debt yield and a 47.5% LTV but have deteriorated over time because the loss of anchor tenants and bankruptcies have affected in-line tenants. Net cash flow decreased to $16.2 million in 2020 from the issuer's underwritten figure of $44.8 million, which made it difficult to refinance the loan in April. The mall is down two department stores after collateral anchor J.C. Penney closed in July 2017 followed by noncollateral Lord & Taylor's departure in January 2020. According to the RealDeal, offers from potential buyers of the West Nyack, New York, mall have been less than $155.5 million.
The mall differentiates itself from its competitors by offering numerous entertainment options, which include a movie theater, an indoor speedway, a bowling alley, a comedy club, and Dave & Buster's. The mall also has, according to its website, the world’s tallest indoor ropes course. Despite the hefty stable of experiential tenants, we believe the property is losing out to nearby competition, which includes five super-regional malls, three lifestyle centers, and one regional mall within a 20-mile radius. The Shops at Nanuet, an open-air lifestyle center, whose Apple store relocated from the Palisades Center, is just four miles from the property and is sponsored by Simon.
The loan sponsor is the Pyramid Companies, which is the largest privately held U.S. mall developer with 12 properties backing 22 CMBS loan pieces with a total balance of more than $1.9 billion, and which owns and operates 16 malls totaling 17.8 million sf in the northeast United States. The company has been struggling since the start of the pandemic and has 15 CMBS loan pieces backing 12 malls in special servicing. The borrowers for the loan, which is specially serviced and current with respect to monthly payments, are responsible for $141.5 million in mezzanine debt.
Crossgates Mall
The collateral for the Crossgates Mall, another Pyramid-owned center that backs $256.7 million in debt spread across COMM 2012-CR1, COMM 2012-CR2, and COMM 2012-CR3 (none of which are DBRS Morningstar rated), is 1.3 million sf of a 1.7-million-sf regional mall in Albany, New York. In contrast to the Palisades Center, the Crossgates mall loan, which matures in May 2022, was less conservatively underwritten with a 64.0% LTV and a 9.1% debt yield. But 2020 revenue fell by more than 30% from 2019, while expenses remained flat, resulting in the debt service coverage ratio (DSCR) tumbling below break-even as occupancy dropped to 81.0% in December 2020 from 90.0% the prior year.
The mall is down just one anchor after Lord & Taylor closed at this location following its announcement in August 2020 that it was going out of business. Macy's and J.C. Penney are the mall's remaining department store anchors, with the collateral J.C. Penney store on a lease that it renewed to May 2023. While the mall’s Macy's and JCPenney stores have been spared from the retailers’ closing lists so far, exposure to the struggling companies remains a longer-term risk. The other anchors include Regal Cinemas and Dick's Sporting Goods. Major tenants include Burlington and Forever 21. The mall lost about 40% of its value because of the pandemic with an August 2020 appraisal pegging the property's
value at $281.0 million, down from $470.0 million at issuance. Yet the mall has attracted new tenants. Apex Entertainment in 2019 took over the vacant Lucky Strike space; a Lego store opened in 2018; and Skyloft in 2019 leased 16,000 sf formerly occupied by Rascals Steakhouse. Another consideration for a potential positive outcome is that, unlike the Palisades Center, the Crossgates Mall reported steady cash flow before the pandemic, which suggests that with an increase in performance to pre-pandemic levels, the loan might be a viable refinance candidate when it matures in 2022.
Refinancing Prospects
The recent maturity of the Palisades Center loan highlights the difficulties in paying off mall debt. Many owners have had difficulty obtaining financing for anything but the strongest malls in their portfolios. Since the pandemic began, just 26.3% of nondefeased maturing mall-backed loans successfully paid off on or before their maturity date. While recent news has focused on the downturn of the mall industry and the surge in regional malls that have defaulted on their loans, malls that are dominant in their market and those that enjoy stable occupancy have a higher likelihood of paying off at maturity.
Kenwood Town Centre is a 1.2 million-sf Class A super-regional mall in Cincinnati, Ohio, where 756,412 sf serve as collateral and backed a $193.7 million loan in DBUBS 2011-LC1 (not rated by DBRS Morningstar), which paid off after being given a two-month extension to February 2021 maturity. While not the only regional mall in the area, the property has the advantage of being the dominant regional center serving the greater Cincinnati region. The three anchors include Dillard’s, Macy’s, and Nordstrom, and the mall has strong in-line occupancy with numerous high-end retailers including Brighton, Coach, and Louis Vuitton. The loan was a likely payoff candidate thanks to low leverage at issuance and the steady performance of the collateral before the pandemic. The property was refinanced into a single- asset single-borrower (SASB) deal (BPS 2021-KEN, not rated by DBRS Morningstar) with an appraised value of $551.0 million, up from $410.0 million 10 years ago, as the mall's revenue grew by about $7 million over the life of the 2011 loan. Further, the replacement loan was only $210 million, compared with about $235 million in 2011, suggesting an LTV of about 38% for the 2021 transaction, which is low compared with historical LTVs, even for SASB mall transactions. The property’s strong 96% occupancy in September and 2.34x DSCR suggest the property weathered the pandemic better than most and maintained its value.
Nondefeased mall loans totaling nearly $12 billion are scheduled to mature through the end of 2022. The 10 largest loans are displayed in Exhibit 6.
The Starwood Regional Mall Portfolio in the GSMS 2018-SRP5 transaction (not rated by DBRS Morningstar), is the largest at-risk maturing loan. The loan, backed by five shopping malls with 3.7 million sf combined, could lose up to about $50 million based on an updated appraisal that valued the collateral at $557.0 million, down from $1.20 billion at issuance. Starwood’s regional mall portfolio, consisting of properties in California, Indiana, Ohio, and Washington, has been in serious trouble since before the pandemic. All of the malls have a dark Sears store and various degrees of exposure to struggling department stores J.C. Penney and Macy's. Starwood Capital Group in 2020 lost control of the troubled regional mall portfolio when trustees appointed by an Israeli court selected a partnership to take over the seven properties. The unusual debt structure of the seven-mall portfolio includes Israeli bonds subordinated to the CMBS debt. Starwood was hit with a class action lawsuit from Israeli bondholders last year over an alleged failure to disclose risks in the retail sector. A partnership between California-based Pacific Retail Capital Partners and New York-based Golden East Investors won the bidding for the portfolio. According to The Wall Street Journal, the partnership plans to restructure the mortgages and will look to reposition some of the properties.
Looking Forward
As the retail landscape evolves, the health of CMBS loans backed by regional malls, as measured by plunging values, has deteriorated, increasing the risk of potential losses even as the economy emerges from pandemic-enforced lockdowns. Many mall operators are still battling problems that existed before the pandemic, including changing consumer behavior, the rising popularity of online shopping, and an overabundance of retail space. These issues are forcing retailers to reconsider their physical store strategy. Owners of larger Class A malls are largely investing in their properties, while Class B and C malls struggle to find their place amid a changing retail landscape while battling declining customer traffic, falling occupancy rates, and low sales productivity. Malls that occupy a dominant position in their markets may be able to consolidate their gains and wait for weaker competition to fail.
In the past year, DBRS Morningstar has been evaluating the impact of these trends for transactions within its rated CMBS book, with ratings downgrades and Negative trend assignments over the past six months heavily concentrated in deals with exposure to large defaulted or struggling mall loans. As these default and valuation trends provide further insights into the headwinds faced by mall-backed CMBS loans in general, we will continue to analyze the impact to those transactions with exposure and publish a follow-up piece as additional work is completed.
Nation's Biggest Mall Expects Hard Road Ahead for Recovery After Harrowing 2020
Mall of America Sees Double-Digit Drops in Traffic, Revenue And Increase in Crime
By Clare Kennedy March 17, 2021 CoStar News
There are some stunning takeaways in this article:
1) The loss of 45 tenants permanently and the remaining unable to pay their rent.
2) Revenue recovery to start in 2022 and take several more years to normalize.
3) Seeded 45% interest in the property to the lenders.
4) Customer base has not returned - approximately 50% of the 2019 foot traffic.
5) Pronounced increased crime.
6) Lease concessions to the existing tenants a] under market rents, b] rents adjusted on a rolling basis to mall traffic and c] shorter terms.
7) Significant cuts in the mall work-force.
The pandemic has taken a crushing toll on the largest shopping center in the United States, Minnesota's Mall of America, and officials say that the effects of that damage could linger for years to come.
An official at the 5.6 million-square-foot megamall in Bloomington, Minnesota, a suburb just south of Minneapolis, said that 45 tenants, mostly in restaurant and attractions, have closed for good, and that many of those tenants that remain are simply unable to pay rent. As a result, total revenues were down 30% over 2020, and mall officials believe that 2021 will follow a similar course.
"We expect revenue recovery to begin in 2022 and will take several years," Jill Renslow, Mall of America's senior vice president of business development, told the city council in Bloomington, Minnesota, this month, when mall officials unsuccessfully petitioned the council to support legislation that would allow the city to use increment financing and liquor tax revenues to fund projects that would increase demand for hospitality in the city.
Given the battered state of the national retail sector, Mall of America's plight is no surprise and not unique among shopping centers nationwide. U.S. shopping mall vacancy rose most significantly among retail real estate properties last year to a rate of 6.8%, which is higher than the 5.1% vacancy rate for the national retail market, according to CoStar.
Even so, the specifics recently shared by mall executives paint a sobering picture, particularly in light of news that the owners may have to cede a 49% interest in the mall to lenders looking for recourse on defaulted loans tied to its struggling sister property in New Jersey, American Dream. The company did not respond to requests for further comment.
The Mall of America was closed entirely from March 2020 through June, and since then has been able to reopen at partial capacity.
However, though the doors are open, a substantial portion of the mall's customer base has not yet returned, according to comments from Renslow. Over the last quarter of 2020, Mall of America saw only about 50% of the foot traffic it recorded in the fourth quarter of 2019, Renslow said. Part of the drop off can be attributed to the dramatic decrease in tourism, she said. Typically, visitors make up 40% of the mall's traffic and account for about 50% of its sales.
Though Mall of America is half as busy as it usually would be, Renslow said the number of emergency calls originating from the mall has fallen only 11% to 15% because of a pronounced increase in crime there. Renslow described a surge in issues with drug use and overdoses, assaults, and an uptick in the number of suspects found carrying weapons like knives, pepper spray, and stun guns.
She stressed that the mall's problems with security and safety reflected a broader spike in crime in the Twin Cities at large.
"What is important to note is that this is not a Mall of America issue. Crime is all around us and it's up," Renslow said. "We are no exception."
All of the above has put strain on Mall of America's tenant roster, and the mall's ability to strike deals with existing and new retailers.
From a leasing perspective, she said tenants are "opportunistic and nervous" because of retail's uncertain economic outlook, and many are asking for lease concessions. Some have pushed under-market rent for the next few years or lease rates that would be adjusted on a rolling basis to track the rise and fall of the mall's traffic levels. Many are asking for shorter terms.
Strong performers like Nike, Coach, and Burberry are the exception to the rule.
To cope, the mall has made large cuts to its workforce. Mall of America had 848 employees prior to coronavirus pandemic, and furloughed 90% after the breakout began. After the March to June lockdown ended, the mall permanently slashed its overall headcount by 30% across all of its departments, which include operations, management and administration, security, and attractions.
Nevertheless, Renslow told the council there was reason for cautious optimism.
"The good news is that performance is slowly improving and there is light at the end of the tunnel," she said, adding that the mall hoped to see strong traffic over spring break because of pent-up demand.
Former Simon Property Group Malls See Valuations Slashed Up To 88%
Andrew Martinez February 23, 2021 Bisnow
Malls once part of Simon Property Group’s nationwide portfolio have seen their worth fall off a cliff, with appraisers slashing a handful of valuations up to 88% in recent weeks.
Simon designated 13 of its properties as “non-core” in its latest earnings report. Anchor tenants increasingly vanished from those malls even before the coronavirus pandemic, and all but two of those assets have been transitioned to their lenders, according to DBRS Morningstar.
The approximately 520K SF collateral at Crystal Mall in Waterford, Connecticut, recorded the most dramatic fall, from a valuation of $153M in 2012 to just $18.7M in February, an 88% drop, according to CMBS tracking firm Trepp.
Sears left the mall in 2018, and Macy’s is on its way out as well, according to The Day. Simon was in the process of transferring the mall to its lender as recently as January.
Appraisals for other malls that were until-recently owned by Simon have had nearly as drastic drop-offs in their valuation.
The Square One Mall in Saugus, outside of Boston, saw its valuation drop 75% collateral valuation, Trepp reported last week. The value dropped from $201M at the time of the CMBS loan's securitization in 2012 to $50.5M this month. The vacant Sears and still-open Macy's are not part of the loan's collateral.
The Dover Mall in Delaware, a 554K SF center valued at $129M in 2011 was lowered to $41M in February, a nearly 69% chop. The 385K SF non-anchor space at Mall at Tuttle Crossing in Dublin, Ohio, saw its valuation of $240M in 2011 fall to $80M under a new appraisal, Trepp analysis revealed in December. Both malls are in receivership.
The Emerald Square Mall in North Attleboro, Massachusetts, was handed to JLL by a federal judge in November, The Sun Chronicle reported. The imminent closing of Sears at Emerald Square is expected to trigger co-tenancy clauses, according to a Fitch Ratings note, which would downgrade the rating of the loan. The mall behind $97.7M in CMBS loans hasn't yet seen its valuation cut — it was appraised at $167M in 2012.
Simon saw a $1B revenue drop between 2019 and 2020 as the pandemic kicked into hyperdrive the reckoning facing Class-B malls. When talking about the malls on which Simon had nonrecourse CMBS debt, CEO David Simon said some of the deals could be restructured, but acknowledged the publicly traded firm was comfortable handing back the malls, rather than try to rescue them.
“In some cases, they’ll be restructured, mutually agreed to; and if not, and the special servicer would like to own the real estate, we’re more than happy to cooperate and do it in a professional manner,” Simon said, according to a transcript of the call. "It’s absolutely in the best interest of Simon Property Group shareholders those decisions that we’re making on that front ... [We] hope to make deals in some — if not, then they’ll no longer be part of our portfolio, and we wish that new owner the best of luck."
Simon’s Atlanta-Area Mall Gets No Bids At Foreclosure Auction, Winds Up With Lender
By: Jarred Schenke February 3, 2021 Bisnow Atlanta
Another major Metro Atlanta mall has gone back to its lender.
Two CMBS loans attached to Simon Property Group's Town Center at Cobb mall were foreclosed on and returned to lender Deutsche Bank this week, the Cobb Business Journal reported. There were no bids at an auction Tuesday on the 560K SF retail portion of the 1.2M SF regional mall that was the subject of the distressed loans, the Journal reported.
“It's unfortunate that a mall that size, with that kind of tax base and everything, would be foreclosed on,” Cobb County Commissioner JoAnn Birrell told the Journal. “There could be developers or companies that may look at purchasing it, but with things the way they are — the pandemic, so many businesses closing because of COVID — it’s not a good time.”
The loan for the mall, off Ernest Barrett Parkway in Kennesaw, was split across two separate CMBS deals with one valued at $116.8M and another at $62.6M, according to CMBS research firm Trepp. The value of the mall covered under the loans dropped from $322M in 2012 to $130.4M at the time of foreclosure.
Simon owns six other malls and shopping centers in Georgia, including Lenox Square and Phipps Plaza, both in Buckhead.
This is not the first large mall owned by a publicly traded retail giant to head back to its lender this year.
In January, Brookfield Property Partners transferred the deed to the 1.3M SF North Point Mall in Alpharetta back to its lender, New York Life Insurance Co. Known as a deed-in-lieu-of-foreclosure, Brookfield's loan was valued at a little over $200M at the time of its transfer.
New York Life has since tapped Trademark Property Co. to develop a master plan to overhaul North Point Mall and the surrounding property. It is unclear what Deutsche Bank's plans are for its new mall.
Think 2020 Was Bad for Retail? 2021 Will Be Even Worse
Moody’s Analytics REIS predicts that most of the decline in retail rents and increased vacancies will happen this year.
By: Lynn Pollack February 02, 2021 GlobeSt.com
Comment: This is interesting but once again it does not take into account what is happening along Main Street and the myriad small stores that sprinkle in every single built-up community from urban areas to the more rural counterparts. There are vacancy signs left right and center in almost every single community and many of the stores will lie dormant well into 2022 and possibly 2023. Tier-3 malls are having a really tough time and especially those that have lost anchor. With real estate, from an appraisal point of view, one has to be ever so careful with information in articles such as this. Too many people jump aboard and say retail is on the rebound. Maybe it is, but from the dozen or so landlords that I have interviewed in the last 12-months, I am not too sure so many would concur with everything that is written below. JOD.
The fourth quarter of 2020 saw tepid declines in retail fundamentals that were seemingly out of step with the dire realities of the retail market nationwide, as COVID cases surged and every day brought news of another brand’s imminent bankruptcy or store closures.
Research released by Moody’s Analytics REIS showed that despite a waning appetite for indoor shopping among consumers, the latest numbers aren’t as precipitous as you’d think. The firm’s outlook predicts that most of the decline in retail rents and increased vacancies will happen in 2021, a forecast bolstered by the expectation that many struggling brands may close in the wake of the holiday shopping season. And while the recent stimulus measures will pump up consumer spending, cold weather and a new surge in COVID variants have already led to stricter shutdowns.
The retail vacancy rate increased to 10.5% in Q4, a slight uptick from 10.4% in the third quarter and the highest level since 2013, while mall vacancies also jumped another 0.4% to 10.5%, the highest level in more than two decades. New Orleans led the roster of metro areas with the largest increase in vacancy, followed by Providence, Albuquerque, Cleveland and Richmond. On the flip side, Rochester, Charleston, Fairfield County and Greenville were among those areas with the biggest decline in vacancy.
Average mall asking rents slumped 0.8% in Q4 and 1.8% over the course of the year, and Moody’s expects malls will suffer more than neighborhood and community shopping centers as they bear the ongoing weight of department store anchors closing and the slow struggle of “experiential” tenants like trampoline parks or entertainment companies to rebound in the wake of the COVID-19 crisis. Metro areas with positive effective rent growth during the fourth quarter include Boston, Greensboro/Winston-Salem, Tacoma, Rochester and Memphis, while areas with the biggest decline in effective rent were San Bernardino/Riverside, Denver, Fort Worth, Richmond and Indianapolis.
Net absorption, though dismal at negative 2.13 million square feet, was still an improvement over the lowest quarterly absorption of 4 million square feet in the second quarter of 2018. Of the 80 metro areas surveyed by Moody’s, 23 saw positive absorption, and 62 metros have a higher vacancy rate. Seventy-six percent saw a decline in average asking rent over the year.
Average neighborhood and community shopping center asking and effective rents declined 0.3% to $21.34 per square foot and 0.4% to $18.61 per square foot, respectively, but 20 metro areas posted a rent increase while another eight saw no change. While construction in these types of centers dropped to 623,000 square feet in the fourth quarter (as compared to the previous quarter’s 874,000 square feet), both Q3 and Q4 put up numbers well below the average new supply built during the same periods in 2018 and 2019. Fort Lauderdale, San Antonio, Dallas, Orange County, and Austin led the only eight metros that saw new construction in the quarter.
As retailer bankruptcies continue to stack up and the pandemic continues, Moody’s predicts even steeper declines in 2021, saying many retailers could get “crushed” with the surge in COVID cases. Retail and restaurant sales nosedived over the summer and into the fall and showed a year-over-over growth of a mere $1 billion, according to the Census Monthly Retail and Food Services Sales, and Moody’s notes that the steepest decline was in restaurants (decline of $123.7 billion year-over-year), followed by gasoline sales (down $68.1 billion) and clothing stores (down $61.5 billion). These trends are likely to continue at least in the near term, as e-commerce and online purchasing remain consumers’ shopping method of choice. Already, many retailers are decreasing their physical footprints due to declining fundamentals—a trend experts predict will continue as the COVID crisis deepens.
“Indeed, the pandemic will continue to hurt the retail sector significantly and perhaps more so than other property types given the added pressure from the growth in e-commerce that have and will continue to eat into the bricks-and-mortar retail sales,” the report states.
10,000 Stores Doomed To Close In 2021, Coresight Projects
Dees Stribling, Bisnow National January 28, 2021 Bisnow - NationalRetail
About 10,000 stores will close nationwide this year, according to a new report by Coresight Research. That would set a record for retail closures in a calendar year, besting the 8,741 closures in 2020, when the coronavirus pandemic accelerated already-grim circumstances for the retail industry.
The 2021 closures would represent about 138.5M SF of retail space vacated, Coresight estimates.
The drumbeat of closures has already gotten off to a strong start. As of Jan. 22, U.S. retailers announced 1,678 closures, Coresight reports. These include larger stores, such as JCPenney, Macy's and Bed Bath & Beyond, but also a contraction in small locations like 7-Eleven, which will close 300 stores, and Family Video, which will close 250.
"Store-based retail was heavily impacted by the COVID-19 pandemic in 2020, particularly in discretionary categories, resulting in widespread closures," the report notes, adding that Coresight expects that the fallout will be even greater in 2021.
“It seems inevitable that there will be more retail bankruptcies in the months ahead, including some household names,” Allen & Overy partner Dan Guyder told Forbes. “Some of these were bound to happen with or without the pandemic, but that disruption accelerated the process.”
Last year saw 33 major retailers file for bankruptcy, each precipitating closures. So far this year, three major retailers have filed: Christopher & Banks, which will close most of its 449 locations; Godiva Chocolatier, which will close all of its 128 North American stores; and department store Belk, which hasn't announced closures yet.
Last year, 3,151 closures were in the apparel, footwear and accessories sector, far more than any other kind of retail, according to Coresight data. The second-hardest-hit sector was home and office retailers, with 1,428 locations shuttered, and just below that were department stores, 1,347 of which closed.
Ascena Retail Group accounted for the largest number of closures by a single company in 2020, with 1,156 of its stores vanishing. The company's brands include Ann Taylor, Catherines, Justice and Lane Bryant. Other major closures last year came from Modell's Sporting Goods, Tuesday Morning, Foot Locker and Gap.
Even though a massive number of stores are expected to close this year, there will continue to be openings to partly offset them. Coresight estimates that between 3,500 and 4,000 new U.S. stores will open in 2021. In 2020, there were 3,304 openings.
"In 2021, some retailers are likely to be more confident (relative to 2020), given improvement in the economy and consumer confidence and the rollout of vaccines," the report stated. "As such, we estimate a slight increase in openings this year, albeit weighted toward the second half."
The openings will reflect a shift in consumer habits, however. That was the case in 2020, when more than half of the new stores (1,669 locations) were discounters, which includes dollar stores. Last year, Dollar General, the largest dollar store chain, opened 986 locations, while Dollar Tree and Family Dollar opened 319 and 177 stores, respectively.
Though badly hit as a sector, there were apparel store openings in 2020 as well, and they tended to be discounters too. In that sector, Ross Stores and Burlington Stores opened more locations than any other brand: 66 and 62, respectively.
Cobb's Town Center Mall may be headed for foreclosure
By: Chart Riggall Jan 27, 2021 MDJ, Marietta Daily Journal
Battered by the waves of online shopping and a pandemic that has gutted retail stores, Town Center at Cobb may be headed for the sales block.
In legal notices posted this month in the MDJ, Deutsche Bank Trust, in its capacity as lead lender for the mall, announced it intends to foreclose on the property. The move is tied to a $200 million loan made on the mall in 2012. A potential sale is scheduled for Feb. 2.
Home to over 170 stores, Town Center Mall is owned by Simon Property Group, which also owns Lenox Square and Phipps Plaza in Atlanta, the Mall of Georgia in Buford and Sugarloaf Mills in Lawrenceville.
A source familiar with such transactions said that even prior to the pandemic, Simon attempted to lease out parts of the mall as office space in an attempt to raise much-needed cash.
A spokesperson for Simon Property Group declined to comment to the MDJ on the legal notice.
The legal notice reads: “... Lender acting in its capacity as attorney-in-fact for Borrower, will sell at public outcry to the highest bidder for cash before the Courthouse door of Cobb County, Georgia, within the legal hours of sale on February 2, 2021, certain real property (“Land”), legally described as...” The notice goes on to describe parcels on which the mall sits.
The notice includes little other information about the mall’s financial state. Town Center was closed for over a month between March and April 2020, in the early weeks of the COVID-19 pandemic.
Tracy Rathbone Styf, executive director of the Town Center Community Improvement District, said she did not have any knowledge of the transaction beyond what had been announced in the legal notice.
When asked what the news means for the Town Center area, Styf replied, “We have a strong track record of success in Town Center. Our community continues to be a vibrant submarket for metropolitan Atlanta with a robust pipeline of new developments and existing business expansions including Piedmont Healthcare, Zwick Roell and Edison Chastain in just the past year. We continue to be excited about the growth and development of our community.”
Matthew Norton, an Atlanta-based attorney representing the lender, did not respond to a request for comment.
Marie Moore, general manager of the mall, did not respond to a request for comment.
Town Center is not the first metro-area mall to face financial difficulties in recent months. The Atlanta Journal-Constitution reported last February that Stonecrest Mall in DeKalb County was facing possible foreclosure.
Last week, the Atlanta Business Chronicle reported that North Point Mall in Alpharetta was transferred back to its lender, New York Life Insurance Co., from owner Brookfield Properties.
Coresight Research, a data firm that analyzes retail trends, estimated last year that 25% of America’s 1,000 malls will close within five years.
Growing Share of Retailers Plan to Cut Physical Footprints This Year
Portfolio restructuring is expected to be a bolder, more sustainable solution than mere rent relief.
By: Lynn Pollack January 26, 2021 Globest.com
Takeaways:
1) 40% of CFOs surveyed of CFOs surveyed are revaluing their real estate footprint.
2) 37% retailers expect an increasing revenue increasing revenue over 2020.
3) Almost 50% of retailers where does to three months of expense reserves.
4) US over still stored. Average of 24-square feet per person vis-à-vis 4-square feet per person in Western Europe.
5) BDO says real estate is due for is major reset.
6) Malls becoming less attractive.
More retailers will cut their physical footprints in 2021, according to a new survey of retail CFOs by global accounting firm BDO. Approximately 40% of CFOs surveyed say they are reevaluating their real estate footprint this year, as high unemployment rates and stalled COVID-19 vaccination strategies have brands girding for a lengthy period of reduced consumer spending.
A mere 37% of middle market retailers anticipated increased revenue this year, a sharp decline from 83% of respondents last year in the same category. And only 49% of those polled have enough cash reserves to cover the next three months or less of expenses. Over the last six months, 94% of retailers secured external financing – a significantly higher percentage than expected –and 93% say they plan to in the next six months, with proceeds from a sale or divestment the most likely sources of outside capital.
The US remains “over-stored” – compare an average of 24 square feet per person versus 4 square feet per person in Western Europe – a trend exacerbated by COVID-19 and shelter-in-place orders shuttering brick-and-mortar sales. Temporary rent relief had the ultimate effect of kicking the can down the road, with retailers of all sizes taking a major hit from the fixed costs associated with an extensive physical presence.
The BDO report says a “real estate reset” is due, and predicts that portfolio restructuring will be a bolder, more sustainable solution than mere rent relief. To weather the COVID storm, retailers should shed underperforming locations and consider converting or rebuilding new warehouse and fulfillment spaces to support an improved e-commerce strategy and quicker, more efficient delivery processes.
The report also takes aim at malls, noting they’ve become less attractive both for brands and consumers alike. To survive, retailers will need to make necessary investments to ensure customer safety and hygiene and to reduce crowding and physical interaction. Mall traffic was declining even before the pandemic threw a wrench into physical shopping and enclosed spaces, and vacant or underperforming stores may be best utilized to support last-mile delivery. For Class C malls and other defunct properties, conversion to industrial space may be the best option, though certain types of redevelopment strategies may also have the downside of reducing property values significantly.
U.S. Downtowns Yearn for Vaccine as Merchant Traffic Falls 70%
Bloomberg News analyzed foot traffic data for downtown merchants in five major U.S. cities and compared them to merchants in five nearby suburbs.
BY: Michael Sasso and Andre Tartar December 3, 2020, Bloomberg
The Chicago Loop Alliance, which promotes the downtown core, rolled out a Back-to-Work website in early October encouraging workers to put on slacks again and try returning to the office.
Its hope was short-lived. Covid-19 came roaring back in Chicago within weeks of the campaign’s launch, and the alliance quickly toned down the program. “The hard push to get people to come back has definitely softened, for now,” said Jessica Cabe, a spokeswoman for the group.
In recent weeks, foot traffic at downtown merchants was down by around 70% in U.S. cities including Chicago and San Francisco, according to smartphone data compiled by SafeGraph Inc. Suburban businesses are closer to normal, though still down from 2019.
One of the biggest shifts of 2020 was the flow of economic activity into suburban or rural main streets from urban downtowns. Many Americans abandoned commutes into cities or sought larger living spaces as they worked from home, a trend that looks to endure even after the virus-threat subsides. The transformation portends dire repercussions for metropolitan business districts.
Bloomberg News analyzed foot traffic data for downtown merchants in five major U.S. cities and compared them to merchants in five nearby suburbs for the period spanning mid-October through November -- a period that included Black Friday.
Downtown merchants in Lower Manhattan, Chicago, Atlanta, Dallas and San Francisco saw an average foot traffic decline of between 64% and 77% for the period, with downtown San Francisco suffering the most. Meanwhile, the suburbs saw a decline of between 31% and 45%, with the Chicago suburb of Schaumburg, Illinois faring the best.
Ripple Effect
In Atlanta’s urban center, restaurateur Alan LeBlanc is staying open despite losses in hopes of inspiring a ripple effect. “If you look out the window and everything’s closed, then you might say, ‘Let’s reconsider bringing people back at the next meeting,’” said LeBlanc, whose White Oak Kitchen & Cocktails, a staple of business lunches, is getting by on 15% of its previous revenue. “Maybe if they see open businesses, it will encourage them to bring people back.”
The pandemic seems custom-made to savage central business districts and their small businesses, with just 11% of Manhattan’s office workers back at their desks through September, according to real estate firm CBRE Group Inc. Nationwide, occupancy rates in downtown offices are easily below 20% and as low as 5% in some cities, said David Downey, president of the International Downtown Association.
Vehicles travel along a nearly empty highway in Atlanta, Georgia, U.S., on Tuesday, July 21, 2020. Georgia Governor Brian Kemp sued the mayor of Atlanta to stop her from enforcing a city mandate that people wear masks in public given a spike in coronavirus infections.
Meantime, the dearth of housing units in many city centers will push urban planners to rethink their commercial-residential mix, Downey said. In Atlanta, about 150,000 people work in the downtown area, but it has only around 13,000 residences, and a fair number of those are student housing, said Wilma Sothern, a marketing vice president at non-profit Central Atlanta Progress.
Down 90%
Around noon on a recent weekday, the swivel chairs were empty and the clippers quiet at American Haircuts in downtown Atlanta, a barbershop that caters to professionals in a subterranean mall. Co-owner David Alexander opened the shop two months before the pandemic hit and since then business has dropped 90%. More suburban American Haircuts units that he and his partners own in Kennesaw and Roswell, north of Atlanta, are down only 10% and 15% respectively.
His downtown shop has survived through generous rent concessions from its landlord, but Alexander isn’t sure it’ll stay open much longer.
“At some point, I realize the landlord has a mortgage or bills they need to pay too,” Alexander said. “I think it’s all going to depend on a vaccine sooner rather than later.”
As cold weather sets in, downtown merchants worry that outdoor dining and other pandemic workarounds will become impractical, and the mortality rate for shops and restaurants will grow.
So far, only 29% of the 1,140 retailers, restaurants and merchants operating in Lower Manhattan before the pandemic were closed in November, according to the Alliance for Downtown New York, although the group’s president is worried what might happen after Thanksgiving.
It isn’t known if or when the federal government will pass another small business relief package, such as the now-ended Paycheck Protection Program that distributed more than 5 million forgivable loans to small businesses.
Also, brick-and-mortar retail is off to a slow start this holiday season, with visits to physical stores in the U.S. down by 52% on Black Friday compared to a year ago because of Covid-19 and social distancing requirements, preliminary data from Sensormatic Solutions show.
Many retailers are spreading deals across the season this year, and in-store visits should improve in December as people make last-minute purchases, said Brian Field, Sensormatic’s senior director of global retail consulting.
Jim Mannos is debating whether he’ll need to shutter his Exchequer Restaurant & Pub in Chicago’s Loop district, until spring. Business is down 85% at the restaurant that boasts that Al Capone purportedly relaxed there. The Illinois governor’s recent move to ban indoor dining will make things harder.
“We don’t know really how the future’s going to be, because if it’s so bad that they’re not allowing any indoor seating, its going to be hard to stay open,” Mannos said.
For now, many in real estate are assuming that companies will shuffle their workers back into offices eventually, as evidenced by Facebook Inc.’s leasing of 730,000 square feet in Manhattan over the summer, said Bloomberg Intelligence analyst Jeffrey Langbaum.
“At this point, I think there is just a pause until a vaccine is widely distributed, before employers feel comfortable asking their employees to come back,” Langbaum said.
2020 Sets New Record As Retailers Announce Plans to Close More Than 11,100 Stores
Some Markets Appear Better Positioned to Weather Fallout From Contracting Retailers Than Others
By: Kevin Cody and Robin Trantham December 2, 2020 CoStar Advisory Services
JSO Commentary
CoStar consistently produce excellent articles across all sectors of the built environment. This one happens to be particularly good since it is incorporating different areas of the retail environment that tend to go under-reported or not-reported. Without recapping the entire article besides the typical retail outlets, it touches on such topics as Experiential Retelling and how these have been shattered by the pandemic. It also covers small Main Street retail businesses that are so often overlooked but in essence create the backbone of retailing within the United States. Pandemic has decimated these businesses too, which generally do not have to deep pockets (not under capitalized as a rule) but also do not have the access to financing and loans that say the Macy’s, Stein Mart of the world have. Over the next few months we will read about frontline malls and there future. But here to this has been touched upon yielding an extremely well balanced article. However in the end, I’m not sure there’s any good news within this sector.
With the traditional holiday shopping season upon us, retailers across the country are holding out hope for a surge in shoppers. Notably, October retail sales came in nearly 5% above pre-pandemic levels and 5.7% above sales levels in October of 2019.
And while the pandemic has accelerated the shift in shopping preference to e-commerce, physical retail sales in October were a rather healthy 1.5% above pre-pandemic levels.
Although this was a positive sign for the retail market overall, every retail subsector has been impacted differently over the past several months. Some sectors have benefited from the pandemic, while others have struggled and, in many cases, have been forced to close stores.
Year to date, more than 40 major retailers have declared bankruptcy and more than 11,000 stores have been announced for closure, totaling nearly 150 million square feet of retail space.
While the total number of stores announced for closure in 2020 is already a record, it is also nearing the record for store closings on a square foot basis set in 2018. The most impactful announcements have come from traditional retailers, including JCPenney, Macy’s, Stein Mart, Bed Bath & Beyond and Pier 1 Imports. Even before the pandemic, many of these traditional retailers were facing headwinds caused by the rapid rise of e-commerce. The pandemic has only accelerated that distress, ushering what some have described as a decade of changes in a year's time.
Experiential retailers, on the other hand, were a key source of demand growth for retail owners prior to the pandemic. However, these types of retailers have since been shackled by the social distancing and lockdown measures imposed to contain the spread of the virus. Gold’s Gym, 24 Hour Fitness and Studio Movie Grill, as well as numerous restaurants, are among the experiential tenants that have been forced to permanently shutter locations due to the pandemic.
It is important to note that the tracking of these store closures is limited to the announcements issued by major chains. It does not reflect the significant toll the pandemic has taken on small businesses as well.
According to Yelp, nearly 100,000 businesses were permanently closed by September, and more than 65,000 remained temporarily closed, indicating far more retail reckoning ahead than disclosed in the announced store closures.
Based on the store footprints of the retailers that have made announcements, we expect malls to be disproportionately impacted by the latest round of closures. This will ultimately lead to expanding vacancy rates for malls in the near term.
To backfill vacant anchor space, malls owners may turn to creative solutions, including subdividing, demolishing or converting the space to other uses with stronger demand, including office, apartment, industrial or medical. However, these types of wholesale changes are more likely to occur in outdated malls. The owners of high-quality and well-located malls are still better positioned to weather the storm.
On the other end of the spectrum, announced store openings in 2020 have largely been driven by discount retailers, such as Dollar General, Dollar Tree, Family Dollar and discount grocers such as Food Lion, Lidl and Aldi. Notably, these types of expanding retailers generally target lower-income and/or lower-density areas and are not commonly found in malls.
While the pandemic will certainly have a drastic and wide-sweeping impact on the retail sector, every market is going to be affected differently over the next couple of years. Through examining two important retail metrics, foot traffic and forecast buying power growth, it is apparent that retail tenants in many major southern growth markets, such as Raleigh, Nashville, Charlotte and Atlanta, have generally seen retail foot traffic less affected during the pandemic, and are also poised for outperformance going forward.
However, retail tenants in markets where projected demographic growth remains below average, such as New Orleans, New York and Honolulu, have seen their retail foot traffic significantly more affected so far, and may experience an outsized share of move-outs going forward.
Many major western U.S. markets are projected to experience relatively strong household and income growth over the next two years. However, some of these fast-growing markets, including San Francisco, Seattle, Denver and Portland, have also endured relatively dramatic declines in retail foot traffic over the past nine months, likely creating a longer path to recovery for their retail sectors.
In contrast, other western markets, such as Phoenix, San Antonio and Dallas are projected to experience relatively strong demographic growth moving forward and have experienced a less-drastic decline in retail foot traffic.
Many retail investors will face pressure to maintain occupancies in the near term as these announced store closures materialize, leaving behind empty stores in their centers. Finding readily available replacements will be challenging as traditional retailers, which have announced the most store closures, have been unable to adapt quickly enough to the growth of e-commerce. And experiential retailers have also been at risk from the direct impact of stay-at-home orders and social distancing.
Still, retail centers in select markets have been able to weather the pandemic relatively well, and retail centers in those locations are positioned to avoid, or backfill, store closures more efficiently than others.
Retail Cornerstones Fall in Britain, Pushed by Fast Fashion and Pandemic
Debenhams and Arcadia Group, the owner of Topshop, collapsed despite extensive government programs meant to shore up British businesses.
By Eshe Nelson and Elizabeth Pato December 1, 2020 New York Times
LONDON — The British department store Debenhams can trace its history back 242 years to a shop on Wigmore Street in central London. On Tuesday, it finally succumbed to the pressures of 21st-century e-commerce. After more than a year of restructuring and several months of trying to find a buyer, the company said it wouldbegin shutting down.
Debenhams is the second big retailer to topple in two days, after Arcadia Group, which owns brands including Topshop and Miss Selfridge, filed for bankruptcy protection on Monday. The two are also linked because Arcadia’s brands have a big footprint in Debenhams, with sections set aside for their clothes.
And so, as Christmas lights flicker above the sidewalks in Britain’s downtowns and as the busiest shopping period of the year begins after a monthlong lockdown in England, the nation is watching two of its largest retailers fall. They have about 25,000 employees between them.
More bankruptcies are expected, as the lockdowns have relentlessly exposed the retailers that have failed to pick up on customers’ willingness to shop online.
“The retail house of cards on the high street is in danger of collapse,” said Susannah Streeter, an analyst at Hargreaves Lansdown.
Britain’s fashion retailers enjoyed a golden period and were seen for a time as a source of national pride. The Debenhams evening wear department was a middle-class destination for all of life’s major celebrations. Marks & Spencer, which announced plans during the summer to lay off nearly 8,000 workers, was a byword for quality for decades, with its cotton underwear and cashmere knits a staple of British households.
In the 2000s, Topshop — once considered the jewel in the crown of Philip Green’s Arcadia Group — was a genuine style authority thanks to sellout collaborations with the model Kate Moss and a vast Oxford Street emporium laden with catwalk-inspired knockoffs.
But these brands have suffered for years. Fast-fashion giants from overseas, like Zara from Spain and H&M from Sweden, started selling cheaper, trendier clothes. They were followed by online-only upstarts such as Boohoo and Pretty Little Thing (similar to the American brand Fashion Nova). Geared toward young women and powered by social commerce, they offer low-priced fashion products designed to be browsed, bought and worn on social media.
The pandemic has hastened the demise of brands found in Britain’s high street shopping districts. For about a third of the year, clothing stores and other nonessential retailers have been shuttered to comply with lockdowns, accelerating the move to e-commerce. Since February, online clothing sales have grown 17 percent in Britain, while in-store sales have slumped 22 percent.
The old guard retailers and department stores that were too slow to invest in their online operations have found themselves grappling with the costs of real estate empires visited by fewer and fewer people. Even accounting for scores of closures in recent years, Debenhams has 124 department stores, while Arcadia has 444 stores for its brands in Britain.
“Like Arcadia Group, Debenhams might have stood a better chance had its footprint of retail stores been smaller, but they were stuck with too many shops, on long leases they could not wriggle out of,” Ms. Streeter said.
Many fast-fashion retailers continue to thrive throughout the pandemic because they have few or no brick-and-mortar stores. Boohoo and Pretty Little Thing generally source from British-based manufacturers in cities like Leicester. Clothes can be produced quickly and distributed faster within the country.
“If you are a high street shop, you have to sell a considerable amount in order to just break even,” because of high business property taxes and rents, said Stewart Perry, a partner in the insolvency and restructuring practice at Fieldfisher, a European law firm. “They are competing with a warehouse in the back-end of nowhere.”
This summer, Boohoo came under intense public scrutiny after reports that its suppliers in Leicester were paying workers as little as 3.50 pounds, or $4.40, an hour. (The national living wage in Britain for ages 25 and above is £8.72, or $10.93.) But investors had already placed their bets on Boohoo. Its share price is up 7 percent this year, while the benchmark stock index in Britain has dropped 15 percent. In the past five years, Boohoo’s share price has risen more than 800 percent.
Retailer Pet Valu to Shut Nearly 360 Stores, Warehouses in US
By Linda Moss November 5, 2020 CoStar News
In yet another casualty of the pandemic, pet-supply retailer Pet Valu plans to shutter all its nearly 360 U.S. stores and warehouses.
The chain said it is winding down its operations, its brick-and-mortar sites in the Northeast and Midwest, as well as closing its corporate headquarters in Wayne, Pennsylvania.
Pet Valu U.S., operating for more than 25 years, licenses its name and contracts for services from Pet Valu Canada, a separate company headquartered in Markham, Ontario. The Canadian business, a chain with about 600 stores, is not affected by the U.S. move.
"The company's stores have been significantly impacted by the protracted COVID-19-related restrictions," Jamie Gould, Pet Valu's recently appointed chief restructuring officer, said in a statement. "After a thorough review of all available alternatives, we made the difficult but necessary decision to commence this orderly wind down."
Pet Valu joins a long and seemingly ever-growing list of brick-and-mortar retailers that have been put out of business amid the COVID-19 outbreak, including Lord & Taylor and Pier One Imports.
Pet Valu is owned by Roark Capital Group, a private equity firm based in Atlanta. The retailer operates small-format stores that sell premium pet food and supplies.
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Men's Wearhouse, Jos A. Bank Owner to Emerge From Bankruptcy By Late November
Landlords Take Major Hit in Tailored Brands Bankruptcy Plan
By Marissa Luck November 13, 2020 CoStar News
Tailored Brands is expected to emerge from bankruptcy later this month as a leaner company with a smaller real estate footprint and a greater focus on digital offerings to augment its brick-and-mortar footprint.
The owner of Men’s Wearhouse and Jos A. Bank received approval Friday from a federal bankruptcy judge in Houston to move forward with its restructuring plan. The plan confirmation comes at a critical moment before the holiday shopping season, when many retailers are counting on Christmas shoppers to make up for lackluster sales in the pandemic. The retailer, with a split headquarters between Fremont, California, and Houston, had more than 1,400 locations in North America when it filed for bankruptcy protection in August.
As has become common in retail bankruptcy cases in the pandemic, landlords with rejected leases are likely to lose thousands of dollars where Tailored Brands has shut stores. The case is a reminder of just how vulnerable landlords are in the sea of bankruptcy cases washing over the retail sector.
“Landlords are essentially taking one of the largest hits in this case. They are not only losing a tenant, but now they are faced with having to refind a new tenant, which is an uphill battle in this enviornment,” said Eric Horn, a partner at the New York law firm A.Y. Strauss LLC, who represented a landlord with a rejected lease in the case.
A review of rejected leases by CoStar News shows that Tailored Brands is closing or already has closed at least 273 stores, many in high-profile locations and mostly under the Jos.A. Bank brand. A Tailored Brands spokeswoman declined to answer whether there would be any additional retail store closures after the bankruptcy is complete, but earlier this year, the company said it could close up to 500 stores.
Landlords who own the stores where leases were rejected will get a negligible amount compared to what they owed, said Horn. Under the plan, landlords with rejected leases, as unsecured creditors, would get a small percentage of what they are owed or they could take a small equity stake in the company, he noted, citing a disclosure statement filed in bankruptcy court. A landlord with a rejected lease who was owed $100,000 could get as little as $1,003 under the plan, Horn said.
Meanwhile, landlords of properties where Tailored Brands plans to keep stores open are in a much better position, Horn added, because the retailer must pay so-called cure claims prior to assuming a lease at those locations. However, even landlords where stores are expected to remain open often have to battle for the amount they believe they are owed. Several landlords have filed limited objections trying to protect how much they are owed in the case. These types of limited objections are common in bankruptcy cases and are usually settled outside court, though, and typically don’t stop the bankruptcy plan from proceeding, Horn said.
Some landlords have already reached deals with Tailored Brands. Simon Property Group, for example, said in court filings that it had reached an agreement with Tailored Brands to resume leases at dozens of locations — otherwise Tailored Brands could be on the hook for $4 million in cure claims plus attorney fees.
Simon Property Group had at least 55 leases with Tailored Brands at the time of its bankruptcy filing, according to the records. And now, Simon also is expected to be part-owner of a key competitor to Tailored Brands — Brooks Brothers — which it agreed to buy for $325 million out of bankruptcy in partnership with Authentic Brands Group. Brooks Brothers,Tailored Brands and the owner of Ann Taylor were all victims of the casualization of the workplace and canceled events cutting into sales of formal wear during the pandemic.
In addition to shuttering hundreds of stores, Tailored Brands has spent the past several months reconfiguring many of its existing locations to support expanded e-commerce sales. The company implemented a new "buy online, pick up in store" offering and contactless payments. In September, the company unveiled a new “Next Generation Store” concept for Men’s Wearhouse outside of Houston, which includes a more modern store format, contactless tailoring and other digital offerings meant to appeal to a younger audience. The Next Gen concept could become a model for future Men’s Wearhouse moving forward, with another location planned to open in near Atlanta in December.
“These and other actions taken while in Chapter 11 are the continuation of a strategic transformation that started well before COVID-19 and will position us to compete and succeed for the long term,” Tailored Brands President and Chief Executive Officer Dinesh Lathi said in a statement.
The bankruptcy process is expected to wipe away $686 million of funded debt from its balance sheet. The capital structure of the reorganized company is expected to consist of a $430 million asset-backed loan facility, a $365 million exit term loan and $75 million of cash from a new debt facility to support ongoing operations and strategic initiatives, according to a statement Friday from Tailored Brands.
The company had 1,274 retail locations in the United States and 125 stores in Canada when it filed for bankruptcy, according to court documents. That encompassed 9 million square feet of retail space and about $416 million in occupancy costs, wrote Holly Etlin, Tailored Brands’ chief restructuring officer, in court filings. The retailer also owned 1.8 million square feet of distribution space and leased another 6 million square feet of distribution space, she said.
Here's How Mall Redevelopments Could Tank Property Values
Converting these malls to fulfillment centers, apartment complexes, schools or medical offices could reduce their property values anywhere from 60% to 90%.
By: Les Shaver October 19, 2020 Globest.com
Even before the COVID-19 pandemic, many malls around the country were in trouble. The obvious solution for real estate investors and developers has been to turn these decaying centers into other property types.
The case for these conversions is straightforward: In the US, there is an oversupply of retail buildings, and many defunct malls have already been converted to industrial uses.
Since 2017, a total of 13.8 million square feet of retail space has been converted to 15.5 million square feet of industrial space across the country, according to CBRE, which expects the trend to continue.
“As online retail evolves and expands, many retailers and developers will find opportunities to convert underperforming stores into final-mile distribution sites to support e-commerce operations,” John Morris, Americas Industrial and Logistics and Retail Leader for CBRE said in prepared remarks.
The Downside
Yet there is a significant downside to this strategy.
In a report titled, “The Long-Awaited Reckoning for Retail,” Barclays Capital says that 15% to 17% of US malls may no longer be “viable as shopping centers,” per CNBC. About 10,000 retail stores could close in 2020, according to Barclays. Once 20% of a mall is vacant, it is at risk of falling into default.
Here’s the rub: Converting these malls to fulfillment centers, apartment complexes, schools or medical offices could reduce their property values anywhere from 60% to 90%, Ryan Preclaw, a research analyst at Barclays, told CNBC’s “Worldwide Exchange.”
If the mall’s land is turned into a mixed-use development, that may offer better recovery values. But that has only happened for about 15% of former malls, Preclaw told CNBC.
Indeed, in an earlier interview with GlobeSt, Jake Reiter, president of Verde Capital, pointed out the difficulty of redeveloping malls.
“If you have enough patience and enough capital, you could redevelop a mall,” Reiter told GlobeSt. “But that’s an art form unto itself. That’s serious money with really smart people that know retail, multifamily, medical office and rezoning.”
For those that have the expertise and patience, the mall conversions could ultimately make sense. It just won’t happen overnight. “I know people that have successfully redeveloped malls, and it has taken them in, good times, ten years,” Reiter says. “It was just an enormously time-consuming and expensive experience. And it took an enormous amount of expertise to do that.”
Coronavirus Will Be ‘Final Catalyst’ To Weed Out Excess U.S. Malls: Study
By: Andria Cheng Senior Contributor October 6, 2020 Forbes.com
Even as the coronavirus has been blamed for the record number of U.S. stores closings and the bankruptcies of notable retailers from J.C. Penney to Lord & Taylor, the pandemic may actually be doing something that’s long overdue in the retail industry: cleaning out the excess retail capacity.
Some 15% to 17% of U.S. malls may no longer be “viable as shopping centers” and need to be redeveloped for other uses, according to a 46-page report titled “The Long-Awaited Reckoning for Retail,” by investment bank Barclays Capital. While that figure may seem staggering, it pales in comparison with data that shows one-third of loans in the space are currently in default, Barclays said.
“The Covid-19 pandemic has likely accelerated a long-expected rationalization of retail capacity in the U.S.,” the report said. It’s “the final catalyst.”
The U.S. remains overstored compared with other countries. Per-capita retail sales square footage for American consumers averages 23.5, about 40% more than that of No. 2 Canada, double that of No. 3 Australia and five times that of No. 4 U.K., the study said, citing a combination of other research.
With mall defaults and closures tied closely to the number of stores vacating malls in the prior year, the fact that a record 15% of U.S. mall stores have permanently closed their doors this year doesn’t bode well for the malls that have been hit hard, Barclays said. For instance, more than 8,000 stores have closed in 500 malls it studied, with the “replacement rate of stores” declining, leading to 106 listed stores per average mall this year, from 111 last year and 112 in 2018.
The percentage of malls with a vacancy rate of more than 20%, which lands them in the “non-viability danger zone,” jumped to 28% in September, from only 8% last year, the study found.
“That makes the tipping point a big issue,” the report said. “Store closings have momentum in malls.”
In the year after a mall loses an anchor tenant like a J.C. Penney or a Lord & Taylor, malls see their traffic drop 5% versus others that don’t lose an anchor, according to the study.
While government-mandated coronavirus shutdowns have hastened the declines of many struggling retailers, many malls and their department store and other tenants were struggling even before the pandemic, and Amazon isn’t the only culprit. Many department stores and clothing retailers have long failed to unveil differentiated merchandise and lost share to others like off-price retailers, led by T.J. Maxx’s parent, TJX.
Aggregate traffic to U.S. malls declined in 20 out of 24 months in 2018 and 2019 and hit bottom in April following pandemic-led mall closings, according to the study, which looked at geolocation traffic and other data for nearly 700 U.S. malls. Mall visits recovered to 55% of January levels by September as many malls reopened.
“There’s no question there’s going to be material rationalization across the whole spectrum, and that’s all the product categories within our retail sector,” be it malls, strip centers, outlets, power centers or lifestyle centers, David Simon, CEO of the largest U.S. mall operator Simon Property, said on a conference call in August.
While a mall operator like Simon, with so-called A malls in coveted locations, should survive the pandemic damage, the underperforming malls may not be so lucky. The bottom 60% of the about 1,000 malls in the U.S. held just 10% of the industry value, the Barclays report found, citing other research.
Converting failing malls to residences or warehouses could result in their values dropping 60% to 90% compared with pre-coronavirus appraisals, Barclays said.
Out of 94 vacant malls in a recent study by the National Association of Realtors in the U.S., 31% were turned into another retail format while 16% were turned into mixed-uses and 14% were converted into warehouses/fulfillment centers, according to the Barclays report.
“The bright spot is warehouses, where Amazon might need to triple its end-2019 footprint just to efficiently operate its current business,” Barclays said.
In a sign that Amazon has “appetite for more local capacity,” foot traffic in some of the online giant’s warehouses, especially those near malls that had seen big store closings in 2018, increased by as much as 400% in the second quarter, the report said.
Still, don’t expect Amazon to be “a backstop for malls.” After all, there are zoning restrictions and “building suitability” issues while the need for new warehouses from Amazon and its e-commerce rivals is limited compared with the number of malls that may not survive, Barclays said.