Mall Landlords, Their Lenders, And Others Beware – The Proliferation Of Retail Bankruptcies Will Create Havoc For Upcoming Mall Refinancing
By: Charles M. Tatelbaum – Tripp Scott, PA
Much has been recently written about the proliferation of retail bankruptcy filings for such chains as Aeropostale, Sports Authority, Fairway Foods, Radio Shack and others. There has also been substantial prognostication that the recent bankruptcy filings in the retail sector are just the tip of the preverbal iceberg of what is yet to come. What has not been fully considered is the domino effect of these cases on the mall landlords, the landlords’ lenders and other retailers in the mall.
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The domino effect takes on many permutations. History has shown that many others besides the mall owners and their lenders will be severely impacted if the renewed financing cannot be obtained, or it is so expensive with a significant interest rate hike that the mall cannot be operated efficiently.
This issue will become acutely serious within the next 18 to 24 months. After the recession, many mall owners were able to refinance their loans to take advantage of the record low-interest rates and the bullish optimism as to the growth in retail consumer spending. Now, many of these loans are maturing which will require refinancing. Bloomberg has recently reported that about $47.5 billion of loans backed by retail properties are set to mature over the next 18 months. While under normal economic circumstances this would not be a significant issue, with the uncertainty of the EU’s future, the world economy and what the Federal Reserve may or may not do this year, the upcoming loan maturities are coinciding with a tighter market for commercial mortgage-backed securities, through which many such properties are financed.
This will have several significant implications for the mall owners, their lenders and current mall tenants. Undoubtedly, assuming that a mall owner is even able to obtain renewal financing, the interest rate will rise due to the market uncertainty, the greater cost of money and the increasing risk of retail bankruptcies. Add to this the spate of store closures already known as well as those that are on the horizon, and mall owners will be slapped with a significant monthly debt service obligation plus tighter loan covenants. This will leave the mall owners with less room to maneuver if a large tenant or several smaller tenants financially fail to create unexpected vacancies. The domino effect will then be passed on to current and future tenants with either decreased landlord services due to the cash flow pressures or higher common area costs to maintain the service level.
The mall owners’ cash flow issues will also be present when a retailer enters Chapter 11 and gives the landlord for an underperforming location an ultimatum as many are doing – “either significantly reduce the monthly rent or face a rejection of the lease which will leave the space vacant.” The decrease in occupancy for the mall owner can also impact any percentage rent revenue that is added to the base rent, as all of the tenants will have sales suffer when there is an increase in unoccupied retail space.
This overall situation has the chance of cascading into a death spiral for many older malls and those serving small and rural communities. The U.S. is already plagued with vacant and shuttered malls which have created problems for lenders and local taxing authorities. With the increased use of online shopping (from on-line retailers as well as the online operations of traditional brick and mortar retailers), unless shopping mall owners are willing and able to invest heavily in capital improvements creating a destination mall (such as ones with an ice skating rinks, dine-in theaters, upgraded food courts, upscale dining venues as examples), they may no longer be able to maintain existing tenants or attract new ones.
Investors in collateralized loan packages and REITs that focus on retail centers need to be cautious over the next two years as the existing paradigm may be a thing of the past, and the investments may be jeopardized. Of course, the domino effect of this possible disaster may have many other permutations that will put a further strain on what many think is still a struggling economy.
Thus, the domino effect of this issue will impact shopping mall owners, the owners’ mortgage lenders, the remaining tenants, the employees whose jobs are lost as a result of the store closures, the local municipalities where tax revenue will be diminished and the communities themselves that will have a blighted area. The real question is whether there a solution to this possible upcoming calamity.