CMBS Cash Flow Crunch Looms As 'Retail' Mall Vacancies Set To Surge

Tyler Durden's picture

In the same way as any and every risk-asset in the world, the price of yield-providing CMBS (commercial mortgage backed securities) have risen to post-crisis highs in the last few months. These are some of the epicentric deals from the crisis that now trade close to par once again. However, the last month or so has not seen CMBS prices push higher with stocks and it appears, as the FT notes, that the reason is becoming clear in the post-holiday-shopping period.

CMBX prices flat since 2013 began...

 

CMBS cash-flow streams are set to drop considerably as up to 15 per cent of the country’s suburban retail centres forecast to close over the next five years in the face of online competition.

The US’s more than 1,300 regional malls, defined as centres larger than 450,000 sq. ft., are being threatened by the boom in internet shopping and tougher competition and as they add, the prospects for second-tier malls are dimming.

Retail is regarded as an especially risky component of CMBS as a mall can go downhill if an important tenant shuts its store because other tenants are usually able to renegotiate their leases if a traffic-driving anchor tenant leaves. That can have severe consequences for CMBS exposed to the mortgage on the property.

 

FT: Online sales threat to American malls

By Stephen Foley and Barney Jopson in New York

Credit market investors are falling out of love with US shopping malls as up to 15 per cent of the country’s suburban retail centres are forecast to close over the next five years in the face of online competition.

 

The proportion of retail properties being put into commercial mortgage-backed securities (CMBS) deals has slumped in the past three years because of concerns about the sector.

 

The US’s more than 1,300 regional malls, defined as centres larger than 450,000 square feet, are being threatened by the boom in internet shopping and tougher competition.

 

“I think 200 are going out of business,” said Gerry Mason, executive managing director at property group Savills. “We’re 15-20 per cent overbuilt. There are just too many stores.”

 

The future of megamalls, which include cinemas, bowling alleys and restaurants designed to lure consumers, appear safe but the prospects for second-tier malls are dimming.

 

Traders are watching the health of stores such as Sears and JC Penney, where sales are falling, and announcements from retailers such as bookseller Barnes & Noble last week, which said it would shut a third of its outlets over the next decade .

 

CMBS are bonds backed by a pool of mortgages on commercial property, ranging from office towers to apartment blocks. Retail property accounted for 56 per cent of the pools coming to market in 2010, according to RBS, but that fell to 42 per cent in the second half of 2011 and dropped to 36 per cent last year. In CMBS deals so far this year, the average is down to 30 per cent.

 

“Investors expressed concern about retail exposure in the long term,” said Richard Hill, CMBS strategist at RBS. Analysts say the market appears to be dividing between mega and second-tier malls, with mortgages on megamalls increasingly being securitised separately in single-property CMBS.

 

Simon Property Group, the largest US mall owner, reported strong earnings on Monday, boosted by higher rents and sales at its high-end malls.

 

Retail is regarded as an ­especially risky component of CMBS because a mall can go downhill if an important tenant shuts its store. Other tenants are usually able to renegotiate their leases if a traffic-driving anchor tenant leaves. That can have severe consequences for CMBS exposed to the mortgage on the property.

 

Ecommerce accounts for roughly $1 in every $10 spent by US shoppers and its market share continues to rise. In last year’s end-of-year shopping season, online sales increased 14 per cent while sales overall were up by just 3 per cent, according to ComScore and the National Retail Federation.

 

Ecommerce has already contributed to the demise of Circuit City, an electronics chain, and Borders, a bookstore. Sears and JC Penney, who often serve as mall anchor tenants have announced store closures in the past 18 months, as have Gap, the fashion chain, and Best Buy, another electronics chain.

(h/t Manal Mehta)