With the great retail bankruptcy tsunami claiming its latest victim on Thursday, when Gymboree announced it wouldn't make its June 1 interest payment guaranteeing a Chapter 11 bankruptcy filing in the next month, the signs continue to mount that the next "big short" - either in the form of REITs, CMBS, CMBX, or single name stocks as discussed here - is shorting America's bloated retail sector in general, and that staple of US "bricks and mortar" retailers in particular, the mall.
As a reminder, last week Credit Suisse made the remarkable prediction that over the next five years, no less than 25% of US mall will close, which in light of the record store closures in just the first five months of the year...
... does not sound too farfetched. After all, the US has an unprecedented glut of retail space which will have to be rationalized either in bankruptcy court or otherwise, before the retail sector can resume growing again. Recall that at the current pace of retail store closures, by the end of 2017, total square footage reductions could reach an all time high of 147M square feet, surpassing the historical peak of 115M in 2001.
Yet like with everything else in the United States, the problem is not uniform, with great result variance on a state by state basis. So, in order to identify potential patterns that could help focus the search for where the "next big CMBS short" should be located geographically, and where loans are most at risk of default, Goldman looked at the experience of retail loans in CMBS 1.0 deals from the 2006-2007 vintages, cohorts which had high loss rates.
One pattern that emerges from the CMBS 1.0 experience is that retail losses were particularly high in the states which faced economic stress in the last recession, such as AZ, NV and MI (Exhibit 3). This pattern suggests extra care should be applied to monitoring CMBS 3.0 loans in states at particular risk of experiencing economic distress in a potential future recession. Candidates here that we would list would include the oil states (TX, LA, OK) and also CT, a state that has experienced job and population loss in recent years, and where no less than three cities, including state capital Hartford, are now on the verge of bankruptcy.