Retail Bankruptcies Take Toll on CMBS Lenders, Says Trepp

by Camren Skelton

In 2017 alone, over $35 billion in CMBS loans were exposed to risk of default by retailers declaring bankruptcy, according to New York City-based Trepp LLC, which monitors the performance of securitized commercial mortgages.

The loans were largely backed by mall properties that had leased space to retailers, many of which are now closing stores.

“In the first 11 months of 2017 alone, more than 30 U.S. retailers filed for bankruptcy protection. That news certainly made those in structured finance take notice to the mounting concern surrounding brick-and-mortar retail,” states the report titled “The 11 Largest Retailer Bankruptcies of 2017.”

As the “retail apocalypse” continues, with consumers increasingly choosing e-commerce purchases over brick-and-mortar malls, certain sectors have been particularly hard hit. Apparel and footwear sales have largely shifted on line, spurring the string of bankruptcies. The report is quick to note, though, that retail sales have actually been on the rise through 2016 and 2017, and that the “retail apocalypse” is simply a shifting of winners versus losers in a changing economic model.

“In step with the rise of e-commerce, the popularity of traditional department store anchors is plunging, and hundreds of malls nationwide have reported dwindling foot traffic,” states the report. “Consequently, retail CMBS loans secured by regional malls and shopping centers are the groups most severely impacted by the recent rounds of retail bankruptcies and deserted department stores.”

There are other positive signs within the retail sector. The holiday season in 2017 was particularly strong, featuring a 5.5 percent sales increase in November and December in 2017 over 2016, according to the National Retail Federation. That represents the largest year-over-year increase since the Great Recession.

As far as CMBS loan exposure from retail bankruptcy, women’s clothing retailer The Limited towers above the rest in both total dollar value and number of loans. The Ohio-based company declared bankruptcy at the start of 2017, closing all 250 of its U.S. locations and selling off its brand name and e-commerce site.

“About $14.7 billion of CMBS debt across 127 notes is exposed to The Limited,” states the report. “But the majority of these loans are collateralized by large regional malls that do not feature the retailer as one of the five largest tenants by square footage.”

Other major retail bankruptcies in 2017 include stalwart toy store Toys “R” Us, which exposed $5.6 billion in CMBS debt, and children’s clothing store Gymboree, which exposed $5.4 billion in CMBS debt.

Certain other retail bankruptcies, though, had little effect on CMBS loans, the report notes. Bankruptcy filings by Styles For Less, Aerosoles, Perfumania, True Religion, Wet Seal and Alfred Angelo Bridal have very little CMBS debt behind them.

In certain areas of the retail sector, meanwhile, things are looking up, the report notes.

“Since middle-market department stores have generally gone out of style, the Class B or lower malls that they tend to anchor have become obsolete. On the other hand, Class A malls boast record-high occupancy levels and rents, as well as waiting lists of new tenants that want to lease their retail space.”

To view the full report, click here.

— Jeff Shaw

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