By Leticia Miranda / Bloomberg Opinion
Malls came out of the worst of the pandemic with the upper hand. Shoppers eager to get back into stores helped fill vacant space and operators were able to wrestle rents higher. But the calm has shattered quickly for the long-beleaguered sector as a crucial funding market seized up and the collapse of a string of regional banks compounds the pain.
All that amounts to another moment of reckoning for malls, particularly mid-tier names that failed to use the brief post-lockdown window to upgrade their mix of tenants, lock in loan extensions and lower borrowing costs. As painful as it might be, one more washout is just what the sector needs to finally put it on a sustainable path.
Even before Silicon Valley Bank’s collapse raised the odds of a recession, malls were facing a challenging year with consumer spending slowing, borrowing costs spiking ever higher and big box stores like Bed Bath & Beyond hanging on by a thread. Interest rate volatility and economic uncertainty has constrained the market for commercial mortgage backed securities, prompting banks to become a more active source of funding for the retail property sector, Abby Corbett, the head of investor insights at Cushman & Wakefield told me. The recent string of failures among regional lenders now further threatens liquidity.
Like other commercial real estate, malls are built on debt. Owners typically provide some equity and depend on bank loans and CMBS lenders for the rest. This mix not only helps them generate better returns, but also fund capital improvements like outside lawn areas and food courts. Debt is literally the lifeblood of malls, says Chad Littell, who leads U.S. capital markets analytics at CoStar Group. Recently, much of the concern swirling around commercial property has focused on the office space. Hedge funds like Polpo Capital Management and Marathon Asset Management are betting that a fall in demand for less-desirable workplaces will make swaths of office property obsolete and put loans linked to them at risk of delinquency. But Fitch Ratings estimated in November that the highest rates of CMBS loan delinquencies will be in retail; climbing to as much as 11.3 percent by the end of this year from 5.7 percent in October. The bulk of maturing class B and C mall loans will likely default as access to capital gets harder, it said; and that was before banking troubles sent a shudder through markets. Regional and local lenders represented about 46 percent of financing for retail real estate in 2022, according to a report from MSCI Real Assets.
It’s not all doom and gloom though. Some mall owners saw the writing on the wall early and used the short window of easier lending conditions and high shopping demand to refinance under more favorable rates and extend their payment deadlines.
For instance, Macerich scrambled to close refinancing deals on several of its maturing loans before the economic head winds ramped up this year. Like other malls, Macerich has seen occupancy rates recover after being crushed by the pandemic. The company last year managed to extend loans or refinance with fixed rates or rate caps for several of its most important properties. It negotiated a three-year extension on a $300 million loan on its prized Santa Monica Place in California, giving it time to fill in empty anchor stores with experiential art exhibition company Arte Museum and the popular Taiwanese dumpling chain Din Tai Fung.
Simon Property Group is among those that focused on high-quality properties well before the pandemic shook the industry. Its dominant position in productive, class A malls “runs counter to the view in some circles that malls are dinosaurs destined for extinction,” Bloomberg Intelligence analyst David Havens wrote last month. “That may be valid for vulnerable class B and C malls losing tenants and anchor department stores.” No doubt there are many mall operators less prepared for the rough economic waters ahead. Take CBL & Associates Properties, which represents some of the challenges facing mid-tier malls. It was slow to pivot to a growing economic divide between wealthy and middle, and low-income shoppers even as peers like Macerich picked a lane. As midmarket retailers floundered, the company hung on to tenants including Victoria’s Secret and Gap. The pandemic threw the company into bankruptcy and while it emerged with a cleaner balance sheet, it continues to struggle. By the end of 2022, it lost three of its malls to receivership and foreclosure.
CBL malls aren’t alone. The American Dream mall, owned by Canadian mall developer Triple Five Group, was sued by bondholders after it refused to make more than $8 million in interest payments. Malls are a deeply local business, which means even strong national operators have weak assets. For instance, Unibail-Rodamco-Westfield, which owns a portfolio of high quality mall properties, missed its deadline to pay off a $195 million loan on its Valencia Town Center mall in Santa Clarita, California, as occupancy rates dragged down sales. Unibail-Rodamco-Westfield expects to sell the property or let it fall into foreclosure, according to its annual report.
The mall business can’t survive without access to debt. But mall owners will need to carefully balance servicing debt with investing in their properties to keep sales afloat. As CBL notes in its annual report, “significant debt payment obligations” could force them to use a large chunk of their cash flow to pay down debt rather than invest in capital expenditures. More debt, less investments to update drab, underperforming malls doesn’t sound particularly sustainable.
For a long time, malls have been siphoned into winners or losers. It was clear heading into the pandemic that losing malls would likely die off and find a second life as apartment buildings or health-care offices. While some of these malls have managed to hang on, this latest upheaval will likely see the debt-burdened operators buckle. For those that are still lagging behind in correcting their business, the mall doors are quickly closing in front of them.
Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News.
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