For retail, 2019 started with a bang…and not of the good variety. This would be bad enough if it were concerning only to retailers and fashion companies. However, there is a direct risk-connection from bankrupt tenants to real estate owners, leading to ‘dead malls” and from there, even worse, to wobbly bonds and banks.
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To catalyze this risk-spotting analysis effort, CrediFi analysts have conducted a study of 3 malls from across the US, in particular, using CrediFi’s unique mix of tenant, owner and lender data. All malls can be similarly analyzed using CrediFi data. Click here to request the study
First, the facts: Through the first half of 2019, 14 retailers with 25 or more stores filed for bankruptcy. In fact, there have been more store closures during the first six months of this year than in all of 2018, according to The Wall Street Journal.
In February of 2019, David Simon, the CEO of Simon Property Group told CNBC he was nervous about more retail bankruptcies happening this year. This would be less concerning if David didn’t run a large REIT that is also the biggest shopping mall operator in the U.S. To be fair, Simon also expressed confidence about plans to bring alternative uses like hotels and gyms to the firm’s shopping malls.
Eight months later, Simon Property Group’s CEO now says the retail industry is “reaching the bottom” of bankruptcies. But is that really the case? And what happens to the financial system if Simon is proven wrong?
Why the Concern? Retail bankruptcy watch list 2020
With 23.5 square feet of retail space for every American, the U.S. has more retail stores than many other countries. For example, Canada has 16.4 square feet of retail space for each citizen, the United Kingdom has 4.6 square feet, and France 3.8 square feet.
In October, Retail Dive published a list of 28 retailers that could go bankrupt in the next year, noting that “the dark days for retail aren’t over”.
Retail lending is on the rise
The risk for larger malls exists in CMBS, but is far from limited to CMBS. In 2017, the Federal Reserve saw signs that banks were limiting their lending to retail CRE properties. Today, despite the rising risk of more retailers going bankrupt, commercial real estate retail lending for malls, shopping centers, and strip malls is on the rise in local banking markets.
Recall – as reported by CrediFi earlier this year in our Bank Risk Report, banks have on-balance sheet retail risk significantly in excess of what many market participants commonly understand.
The Conference of State Bank Supervisors (CSBS), the nationwide organization of financial regulators from all 50 U.S. states and U.S. territories. CSBS’s “Risk Spotlight – Retail Lending” published in August notes that:
- Real estate lending to retail is expanding
- Retail commercial mortgage-backed security (CMBS) loans have the worst delinquency rates, although they are improving
- Single tenants have performed better than malls
- Lender focus should remain on fundamentals such as repayment capacity and collateral values
CSBS also notes that, according to UBS, 75,000 brick-and-mortar stores in the U.S. are likely to shut down by 2026. Last year, the average U.S. household spent just over $5,000 online, a 200% increase from five years earlier.
Retail bankruptcies in 2019
A set of additional predicted bankruptcies builds upon the existing wave from earlier in 2019. In March of this year, CB Insights published a list of “68 Bankruptcies In The Retail Apocalypse And Why They Failed”. The main reasons for retailers filing for bankruptcy in 2019 included physical storefronts, massive debt, and inefficient operations. Retailers going bankrupt during just the first 10 weeks of 2019 included Charlotte Russe, Payless ShoeSource, and Shopko, among others.
The wave does not appear to be over. According to Coresight Research, a consulting and advisory firm that provides analysis and consulting to companies in retail and fashion, there have been nearly 9,000 store closures in the U.S. so far this year. That number could reach 12,000 by the end of 2019.
In light of these retail trends, and related lending activity, CRE players must have a good source of intel, data, and analytics, as to the financial implications.