The result is that shopping malls are becoming obsolete far faster than expected. Nearly $20 billion in loans tied to malls anchored by the now-bankrupt JCPenney and Neiman Marcus department stores are now in default, according to Trepp LLC.
Hundreds of America’s 1,100 malls are expected to shut down because of COVID-19 and pressures from online retailers, experts say, and as many as 25,000 stores will close this year, according to Coresight Research, a research and advisory firm.
New York alone could lose 20% of its hotel rooms by the time the pandemic is over, according to Cushman & Wakefield. That’s 6,800 rooms that will be converted to some other use.
The shakeout across the country is already causing hotels to lose 20% to 30% of their value, according to the Avison Young brokerage firm.
“The hotel industry has been devastated by this pandemic,” said Stephen Michels, the managing director for Cushman & Wakefield’s hospitality practice. “The combined impact has been greater than 9/11 and the financial crisis combined. It’s been very painful for a lot of owners.”
Occupancy rates across the country dropped to 33% for the three months that ended June 30, from 70% during the same period in 2019, while average room rates dwindled to $83 per night from $133, according to Cushman & Wakefield.
This, in turn, led to 738 borrowers defaulting on hotel loans backed by about $17 billion in bonds as of Oct 31, according to Trepp LLC.
That’s down slightly from July. But according to Michels, the Cushman & Wakefield analyst, hotel delinquencies were never this high during the Great Recession.
Once a vaccine has been identified and delivered, Michels says the hotel and motel industry will begin to recover and should be back to full strength by the beginning of 2023. Leisure tourism is expected to bounce back first, followed by corporate travel and finally by group travel and international tourism.
“Large citywide convention and major group bookings have longer lead times than leisure travel,” Michels said. “It takes six to nine months for the group market to get back into full swing.”
In the meantime, however, Michels expects a lot of owners to default on their loans and a lot of properties to change hands. In some markets, like New York, there will be a large decrease in total hotel rooms before the shakeout is over.
“A significant number of hotels will be converted to workforce housing or senior housing or some higher better use,” Michels said. “These will likely be older hotels, with inefficient layouts, and unionized labor structures.”
No longer postponing the inevitable
For shopping malls and storefronts in urban areas, the carnage wrought by the coronavirus is just an acceleration of the retail-apocalypse that was supposed to occur anyway, thanks to Amazon and the trend toward online shopping.
“It was looking pretty bleak pre-Covid because of the transition away from bricks and mortar,” said Manus Clancy, senior managing director applied data, research, pricing at Trepp LLC. “We had been seeing a wave of bankruptcies – big, medium and small. Mall occupancies were dropping from 98% then 92% and down to 86%. Big retailers like Macy’s and Nordstrom’s were closing stores.”
With coronavirus, the bankruptcy trend has only accelerated, Clancy said.
“We will see dozens and dozens of loans go into default and lenders will only be able to recover 30 cents on the dollar,” Clancy said. Lenders that made $100 million loans will only be able to collect $30 million.
As with hotel loans, many loans to these shopping mall owners and large retailers are made in the CMBS, or commercial mortgage-backed securities, market, Clancy said. That’s because these loans are very large – often $100 million to $150 million apiece. So they need to be parceled out among a broad pool of investors.
Trepp LLC counted 652 delinquent retail loans totaling about $18.9 billion in the CMBS as of Oct. 31.
The first investors who will be affected when these loans go bad are big private equity firms like KKR, Clancy said. They are the ones that hold the riskiest pieces of the loan packages. The next to be impacted will be private money managers and hedge funds, who hold the next riskiest pieces. Then pension funds and the big mutual funds that manage money for retirees and average investors.
Unlike in the Great Recession, Clancy does not expect retirees and average investors with 401(k) plans to be as affected by loan defaults this time around.
“Nobody is predicting the problems to reach that high,” he said.
Still, owners of retail properties, especially owners of second- and third-tier malls that have lost their anchor tenants, will get crushed. Some of those malls, which were once valued at $150 million, may get repurchased by a company like Namdar Realty Group for $30 million, That will enable them to continue functioning as malls, Clancy said. But other properties will have to be repurposed.
Mall operator Simon Property Group, for example, is reportedly in talks with Amazon to convert department stores into e-commerce fulfillment centers. Other malls will be converted into office space or used for community colleges, while others will be knocked down and turned into multi-family housing.
In big cities, storefronts are not as likely to be repurposed. Overpriced properties will simply change hands and rents will come down, Clancy said.
“The market may come back, but it will come back at a much lower price per square foot,” Clancy said. “Two-mall cities will become one-mall cities.”
Read from source: https://www.usatoday.com/story/money/2020/11/13/closed-stores-hotels-retail-loan-defaults/6219469002/
