Could commercial real estate (retail) collapse?

JTH's picture
Rank: Senior Orangutan | 496

With companies like JC Penney and Sears having done progressively worse over the past ten years, a large number of department stores have closed in the past year, with plans for more to close in the near future. Since most malls depend on one or more of these stores to bring in customers, it hurts the overall performance of malls. Thus, an increasing number of hedge funds are betting against commercial loans.

It's no secret retailers and malls have been struggling for years, but it looks like the perfect storm is set to hit them in 2017. Bearish bets against commercial loans jumped 50% year-over-year in February--and with problems piling up for malls, it's no wonder. Around $3.5 billion in retail loans were liquidated in 2016. Investment firm Gapstow Capital said losses on mall loans have been "meaningfully higher than in other areas."

Given that malls and commercial real estate appear to be declining, do you think that they could collapse? If so, how big of an impact would this have on the overall economy?

Comments (25)

Apr 4, 2017

Maybe malls will. But the industry as a whole? Nah.

I heard Trump will bring back a bunch of coal and manufacturing jobs though, that should help on the industrial side.

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Apr 4, 2017

Retail is a lot more diverse than just JC Penney-anchored suburban malls. The slow (or sudden) death of malls will not cause commercial real estate to collapse. You're connecting the decline of malls and department stores with a major downturn in commercial real estate overall that then leads to a major downturn in the overall economy ala 2008. That train of thought sounds frankly ridiculous to me.

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Apr 4, 2017

Thank you for the insight. So, let's say that malls die (either slowly or suddenly), how does that affect CRE as a whole? I'm totally on board with the death of malls not equating to a repeat of 2008, but how big of an effect would it have on the economy (if any)?

Apr 5, 2017

As others have pointed out, it would have a negligible impact on CRE and the economy. If anything, it could be a positive for CRE, because you could redevelop the land into something far more valuable. For example, in Orange County CA, a lot of industrial and B retail that has existed for decades has been leveled and redeveloped into Class A apartments and mixed use space.

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Best Response
Apr 4, 2017

$3.5 billion of loans is a rounding error in the commercial real estate economy.

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Apr 4, 2017

Exactly.

Well Fargo did almost $128B in CRE loans in 2016.
CBRE did $12.5B

Apr 4, 2017

CRE no, not for a while, there is still a lot of catch up needed. I think the last recession messed everyone up and now they all think RE is the most bubble prone asset class in the world, I definitely think CRE's growth will slow from the blistering pace we've been on, but slowing down does not equal bubble bursting. Also suburban malls decline does not equal bubble bursting. Suburban malls have been dying for decades, they were effectively built as an unsustainable tax haven. I've been watching these things get dozed and re-purposed my entire life. Yes it will create some problems, no, it should not create a 2008 style collapse. Google search "suburban malls re-purposed."

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Apr 4, 2017

Correction, maybe. Who the hell knows. Collapse? Naw dawg.

Apr 4, 2017

Everyone touts that we're over-retailed on a retail square foot / capita basis. Great slide from MS (I think?) CMBS research a little while back: something like 50% of mall square footage (the shittier half) is only about 16% of total mall value. You do the math

Apr 6, 2017

I don't think there's going to be an 'enormous' impact. I would wager it's going to be a slow death for B and C class assets and owners. Multifamily makes up something like $1 trillion of the $2.9 trillion debt currently outstanding, so that's probably an asset class that would have a large impact.

Monthly retail sales were up 3.7% 3Q16 from 3Q15. Rents and vacancies have stayed flat, but there was a ~20% decline in loan originations for retail for the same time period. As of 3q16, there was $500B in CMBS outstanding, while 30% of that was made up of retail - the largest bucket. This is pulled from MBA's 3Q16 report. So let's say there's $150B in CMBS retail debt to be concerned about. This is probably the debt hedge funds are targeting, but I don't know how much of this CMBS retail matures in 2017 & early '18, which is probably the most riskiest debt outstanding in retail. But from what i've been reading, is that CMBS maturing debt has been able to be refinanced so far in 2017.

Am i correct in my analysis?

https://www.mba.org/news-research-and-resources/re...

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Apr 6, 2017

Echoing the eventual death of B and C malls...the other end of the spectrum is doing quite well. Everyone seems to think malls are dying because of what they read on WSJ. The market tends to react to headlines regarding anchor BKs and department store struggles (Sears, Macy's, JCP), yet most A-quality malls are insulated from these effects in terms of exposure. If I had tons of money, I'd long the high-quality mall REITs and short the low-quality mall REITs; I think that pair trade would perform relatively well over a 5-10 year period.

Apr 9, 2017

Commercial real estate is made of tons of things. Self storage, office complexes, grocery stores, haircut places, etc...

Apr 10, 2017

Commercial real estate is not "declining" by any stretch of reality. Neither are high-end malls or malls in solid urban locations.

Middle class suburban malls, or more specifically low-middle class suburban malls, certainly are, but that is like pointing to the decline of one specific type or brand of vehicle and claiming that all automobiles are dead. This decline isn't new at all - it's been happening for the past 10-15 years - and it's already gone through numerous phases. First it's cause was Wal-Mart, then Target, the the internet, then the "missing middle class" and in reality all of these disruptions are contributing factors.

Failing malls nation-wide also are prime spots for redevelopment as long as the surrounding community can support it. These are massive parcels of land that need minimal horizontal work compared to raw dirt and can cash flow as cheap office space until the redevelopment plans are in place.

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Apr 10, 2017

Premium Factory Outlet Malls are cranking right now. Under 4000sqft per unit. Nike and Reebok are barely leasing 3000sqft now, lol. But it works.

Apr 13, 2017

Just a past due retail haircut, who shops at Sears anymore?

Apr 13, 2017

B&M retail in general is dying a slow death. Hhgregg is one of the latest casualties (not withstanding how it was run, etc.). The more these businesses on shopping centers outparcels keep going away just drives up the empty square footage in retail and thus less traffic overall at the shopping centers.

Many of the smaller malls are dying for sure and it seems that the better fully populated malls could be in the 45-75 miles apart range by the time the weaker ones drop off. In my area we have (4) full blown malls in a 30 mile radius and one of these full size malls currently sits at about 45% full and traffic declining by the month. Two are in great shape and the other is just about fully depleted and will be torn down and redeveloped.

GG Amazon Prime.

Get your facts first, then you can distort them as you please.

Apr 13, 2017

I think there's a fundamental change in the commercial real estate space. Traditional users of office space, big law firms, accounting firms, are using way less space than they used to. Things are being outsourced to B and C locations or are being put on the cloud instead of being filed away physically on site. I think that there's going to be a move towards more warehouses that can be used to store servers for cloud servers and all that.

Apr 13, 2017

Multifamily for the win.

Please don't quote Patrick Bateman.

Apr 13, 2017

Multifamily is where it's at. CMBS spreads are getting wider and wider by the day. This run in the treasuries is causing some major short term pain.

Apr 13, 2017

I don't know exactly, but so such a long time horizon, you should look at demographic data. I'd imagine there will be increased urbanization and population growth will still be greatest in the southern US. Once you look at forecasted settlement patters in the US, you can try to make inferences from that info.

Apr 13, 2017

Data center REITs, which are already a pretty big deal, are expected to grow

Apr 13, 2017
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Apr 13, 2017
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