Traditional shopping malls across the country are facing a decreasing amount of customers, declining profits, and, in certain cases, overall viability. Though numerous specialty malls continue to be quite profitable, many regional shopping malls are not as fortunate. Online retailers dominate an ever increasing share of the retail market, and the retailers that have traditionally made up mall tenants may no longer see the value in as many, or any, brick and mortar stores. Due in large part to the convenience and success of online retailers, American consumers generally spend less time shopping at brick and mortar stores, opting instead to shop from their computers or other media devices. In response, and out of necessity, major department stores have dramatically consolidated their number of locations over the past few years. Regional malls anchored by troubled department stores such as Sears and Macy’s are perhaps faring the worst.
Many retail shopping malls are financed by commercial mortgage-backed security (“CMBS”) loans due to mature in 2017. Just prior to the 2008-2009 recession, institutional investors readily lent money to finance the expansion of traditional brick and mortar retail establishments. However, a decade and a recession later, individual retailers and the larger malls they occupy have struggled to make up for the surge in online commerce just as these loans are coming due. As a result, some are now predicting that many retail mall owners will not be able to refinance loans on their current terms due to lower appraised values, high loan-to-value ratios and fewer creditworthy tenants.
With billions of dollars in outstanding CMBS debt that large mall owners may be unable to refinance, the CMBS industry is bracing for potentially significant losses. Losses from 10-year CMBS loans issued between 2005 and 2007 have already totaled $32.6 billion. In the cases where lenders are unwilling to refinance struggling retail CMBS loans, the loans are often transferred to a special loan servicer, which may decide how to manage the property, explore alternative arrangements, such as a loan modification, or prepare for foreclosure or other remedial actions.
Given the stress and pressure on these loans, it is possible that we may see closures of additional regional shopping malls in the near future. For struggling retail shopping mall owners, the financing options simply may not be available.