Mall property values are shrinking in many areas of the U.S., and landlords are increasingly throwing in the towel when they get underwater, according to The Wall Street Journal, which detailed such financial decisions at a host of troubled malls nationwide. Last year, from January to November, 314 loans secured by retail property — totaling about $3.5 billion — were liquidated, a rise of 11% from the same period in 2015, according to data from Morningstar Credit Ratings cited by the Journal. The loans were some $3.5 billion in total and liquidations meant a loss of $1.68 billion.
Retail property loan delinquencies rose by 0.6 of a percent point to 5.76%, according to data from real estate research firm Trepp LLC cited by the Journal. “Special servers” that handle troubled commercial mortgage securities took on $3.1 billion worth of retail property-backed loans last year, up from $2.9 billion in 2015, Trepp said.
Larger landlords aren’t necessarily paying for their moves in their credit ratings, though. “It doesn’t negatively impact their corporate credit quality,” Steven Marks, Fitch Ratings’ U.S. REIT group chief, told the Journal. “If anything, we oftentimes view these transactions positively, as it indicates financial discipline to not commit corporate capital towards failing or uneconomic investments.”
The economy has steadily gained steam, but a lot of retail commercial real estate still looks like what consumers went through at the time of the Great Recession, when homeowners found their mortgage debt outpacing their homes’ value. The trouble comes as malls below the top tier are being squeezed by a retail environment that includes falling store traffic, changing consumer tastes and rising e-commerce sales. Financing for these malls is also becoming more difficult because landlords have fewer options than they did a decade ago.
Green Street Advisors last year suggested department stores will have to close hundreds of additional locations in order to recapture previous levels of productivity—something that could decimate malls. That would bring the number of malls closer to what they should be, according to retail analyst Jan Kniffen, who said last year that there are some 1,100 enclosed malls in the U.S., but that the number should be closer to 700.
While the Great Recession halted much of the unsustainable expansion of retail space that has steadily diluted retailers’ sales per square foot averages, the U.S. remains overstored. In a recent report, CoStar Group contends that nearly 1 billion square feet of U.S. store space must go by closing stores, converting retail space for other uses or reducing rents.
"Simply put, it all comes down to productivity," Suzanne Mulvee, director of U.S. research, retail for CoStar Portfolio Strategy, said in the report. "Retailers on average are generating fewer sales per square foot than they did during the decade leading up to the recession."
But not all malls are struggling. Simon Property Group last spring burnished its full-year forecast last year, beating expectations, leading CEO David Simon to push back against the widely-held notion that American malls are dying. He also dismissed the threat posed by e-commerce, saying “The Internet is not the panacea.”
In the age of omnichannel, mall landlords may need to find new ways of calculating their centers’ and their tenants’ productivity — as should their tenants themselves, says Hongwei Liu, co-founder and CEO of wayfinding technology firm Mappedin. “Traffic as we all know is only going in one direction, but revenue is going up,” Liu told Retail Dive, noting the value of traditional store and mall metrics is “breaking down because of accounting, not because of Amazon. When the customer wants red jeans instead of blue, and comes in and tries them on the store and orders the red — you know that your store created that value. That’s where productivity is."