The rapid clip at which mall landlords are seeking bankruptcy protection during the COVID-19 pandemic, as well as beforehand, could mean things are getting worse for the industry before they get better. Mid-sized publicly listed mall owners CBL & Associates Properties and Pennsylvania Real Estate Investment Trust announced they were filing for Chapter 11 bankruptcy protection last week, The Wall Street Journal reports. The companies made the decision after their debt restructuring efforts failed.
Retailers Brooks Brothers, J.C. Penney and Neiman Marcus have recently filed for bankruptcy too, but that’s not as unusual as when real estate investment trusts (REITs) that own malls or shopping centers do it. REITs usually carry more conservative debt levels than lot of retailers. They’re also more diversified with multi-year leases secured with different tenants. These factors still didn’t make the bankruptcy filings a surprise to industry analysts, however.
“Retail has gone through a radical transformation in the last five years,” Larry Young, a managing director at consultant AlixPartners’ turnaround and restructuring group told The Wall Street Journal. “You are getting a knock-on effect as lessees move out. A fundamental reset is what you should be thinking about.”
Bleak outlook for the mall industry
It’s not just individual retailers who have had to close their doors recently; malls in general are shutting down, too. The Metrocenter Mall in Phoenix closed in July—weeks after it was allowed to reopen. The mall had been there for 47 years and comprised about 30 tenants—about a fifth of what it had in its heyday. Meanwhile, Cascade Mall (Burlington, WA) and Northgate Mall (Durham, NC) also closed in recent months.
Some mall owners saw their stock rise on November 9 after it was announced a COVID-19 vaccine proved 90% effective in trials had been developed. For example Simon Property Group’s stock price went up 28%—perhaps a bet that as public health fears go down, people will go to malls again. Even if the pandemic is controlled, the amount of department stores and other retailers that are struggling will continue to be an anchor on the mall industry, according to analysts. The government-ordered shutdowns and social distancing guidelines diminished rent collection and in turn made it harder for mall owners to pay down their debt.
A lot of malls that were bought with a mortgage during the last decade are now likely underwater, resulting in owners returning properties to the lenders. There are lenders who don’t necessarily want a struggling property on their balance sheet, so they instead extended the mall owners’ loan. From the beginning of this year to October, 76 loans totaling $1 billion that retail properties secured have been liquidated—about half the number of loans from the same time period in 2019, according to credit ratings firm DBRS Morningstar.
“The quantity of distressed debt and distressed opportunity is at a historical high,” Andy Weiner, president of RockStep Capital, a shopping center investment firm that owns 11 malls across the country, told The Wall Street Journal.
A chance for improved landlord-tenant relations
If there are any positives that can be taken from this ordeal, it’s that there has been a chance to for healthier business relations between landlords and tenants to develop. Business have had to become more flexible—clauses have been created so tenants can have their rent reduced if key tenants or a certain number of them vacate a retail space. Other landlords have allowed for rent abatements (suspended or reduced rent payments) in exchange for less restrictions on how they can lease nearby space.
“I’ve never seen more flexibility in these conversations,” Dana Telsey, chief executive of Telsey Advisory Group said during a recent online discussion.
Meanwhile, a lot of mall owners are moving away from the traditional mall makeup and preparing to live with just one department store. RockStep Capital remains optimistic about the industry and plans to acquire some of these malls and lease space to more modern tenants and offer more affordable leases.
“We are reaching out and welcoming conversations with communities concerned about the viability of their malls,” Mr. Weiner said recently.
Joe Dyton can be reached at firstname.lastname@example.org