Investment Analysis Distressed assets

Surviving Retail in Troubled Times

The COVID-19 pandemic has exacerbated and accelerated already challenging circumstances for shopping malls and their owners, but there may be other options for these beleaguered assets.

Although 2020 is now in our rearview mirror, the impact of this turbulent year will be felt in the commercial real estate industry for years to come. While the industrial and apartment asset classes have navigated the COVID-19 pandemic relatively unscathed, the retail asset class has been battered by the pandemic. As the pandemic shuttered most of the U.S. economy in the second quarter of 2020 and caused retail sales to fall precipitously, many retailers were wounded. In some instances, those wounds were fatal, with as many as 25,000 stores expected to have closed in 2020. 

Considering the social and economic upheaval that has occurred since that initial shock, retailers have experienced a wide variation in performance. Grocery stores, dollar stores, and other essential retailers have survived, and in some cases thrived, as the pandemic has unfolded. However, department stores, apparel retailers, restaurants, and other similar purveyors of non-essential goods have struggled.

Trouble at the Mall

American shopping malls faced significant adversity long before the coronavirus came to our shores. Amid the pandemic, those headwinds have only grown stronger. While department store sales have steadily declined in the past two decades, e-commerce sales have grown dramatically in the same time frame. 

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The closure in many areas of department stores like Sears, JCPenney, and Lord & Taylor along with retailers like Brooks Brothers and Forever 21 has created significant vacancy in shopping malls and placed tremendous financial pressure on shopping mall owners.   

The Crystal Mall in Waterford, Conn., is a classic example of the challenges faced today by many B-class and C-class shopping malls which constitute approximately 70 percent of all the malls in the country. If you include restaurants and other nontraditional retail outlets, Crystal Mall has the potential to house 80 retail tenants. In 2018, Sears filed for bankruptcy and closed its anchor store there. This closure resulted in reduced customer traffic in the mall, which in turn hurt other retailers.  Since the Sears bankruptcy filing, six other retailers in the mall have filed for bankruptcy including JCPenney, Neiman Marcus, Men's Wearhouse, Forever 21, and GNC. Retail industry experts project that there will be more retailers filing for bankruptcy protection in 2021. As of this writing, 35 storefronts in the mall are currently vacant. Between the bankruptcies, store closures, and prior vacancies, 44 percent of the available store space in this mall is vacant. Will it survive? The jury is still out, but it is doubtful. Is this the fate of similar B- and C-class shopping malls across the country? 

Troubled Retail Assets

In order to understand the true magnitude of the troubled mall problem, it is instructive to examine the delinquency rate of retail commercial mortgage-backed securities (CMBS) since most retail shopping malls are financed with CMBS debt. As of December 2020, 12.94 percent of all retail CMBS debt is more than 30 days delinquent.

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This delinquency rate has nearly tripled in the past 12 months. In many instances these delinquency numbers do not reflect some of the loans that have been designated as current, but those loans are current only because of the granting of forbearances and the authorization for borrowers to use replacement reserves to bring their debt service payments up to date.  

Creative Solutions for Retail Properties

Some commercial real estate industry estimates note that total retail real estate square footage could contract by 20 percent by 2025 due to the growth in e-commerce sales, falling department store sales, retailer bankruptcies and other similar challenges. One major driver of this reduction in retail space will be the closing of B-class and C-class malls. Adaptive reuse of these failing retail properties as warehouse/distribution space, medical facilities, educational centers, and municipal and cultural facilities are options. Another option is to re-imagine these shopping malls as mixed-use urban town center properties that contain residential, vibrant retail, family entertainment, and office components.

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The Randall Park Mall in North Randall, Ohio, is one example of successfully repurposing a closed shopping center. Opened in 1976, the mall contained 2.2 million square feet of retail space at its height. It included five department stores that served as anchors. In 1996, this mall began its decline and ultimately closed in 2009. It sat abandoned for several years and became a community eyesore. In 2018 the mall was repurposed as an Amazon fulfillment center that provides 2,000 local, full-time jobs as well as a new source of tax revenue for the community. The demolition and development of this 855,000-sf distribution facility cost $177 million.

Troubled shopping malls can be adaptively repurposed to provide new sources of tax revenue for municipalities and to inject new life into local communities. However, there are many political, legal, financial, and market challenges that can be encountered in the process.  For example, there may be zoning issues that must be addressed. The community may fear and oppose the proposed new use. The political establishment may perceive that there will be a loss in sales tax revenue. The property owner, the proposed user, the municipality, and all other stakeholders must work together to address these issues if the adaptive reuse is to be successful.

Troubled retail assets will be a part of the commercial real estate landscape as we progress through 2021 and subsequent years. Commercial real estate professionals can position themselves and their clients for success by providing creative, adaptive reuse solutions that address the market needs and demands.


Editor's note: This article was adapted from the CCIM Institute course, "Troubled Assets and Opportunities in the Age of COVID-19."

Byron Smith Sr., Esq., CCIM, CRB

Byron Smith Sr., Esq., CCIM, CRB, is president at Metropolitan Realty Group Inc. in Vienna, Va.

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