Category Archives: Holiday Shopping

Half Of US 1,100 Regional Malls Projected To Shut Down Within Ten Years

Mall Investors Are Set to Lose Billions as America’s Retail Gloom Deepens

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The blame lies with online shopping and widespread discounting.

The dramatic shift to online shopping that has crushed U.S. department stores in recent years now threatens the investors who a decade ago funded the vast expanse of brick and mortar emporiums that many Americans no longer visit.

Weak September core retail sales, which strip out auto and gasoline sales, provide a window into the pain the holders of mall debt face in coming months as retailers with a physical presence keep discounting to stave off lagging sales.

Some $128 billion of commercial real estate loans—more than one-quarter of which went to finance malls a decade ago—are due to refinance between now and the end of 2017, according to Morningstar Credit Ratings.

 

Wells Fargo estimates that about $38 billion of these loans were taken out by retailers, bundled into commercial mortgage-backed securities (CMBS) and sold to institutional investors.

Morgan Stanley, Deutsche Bank, and other underwriters now reckon about half of all CMBS maturing in 2017 could struggle to get financing on current terms. Commercial mortgage debt often only pays off the interest and the principal must be refinanced.

The blame lies with online shopping and widespread discounting, which have shrunk profit margins and increased store closures, such as Aeropostale’s bankruptcy filing in May, making it harder for mall operators to meet their debt obligations.

 

Between the end of 2009 and this July e-commerce doubled its share of the retail pie and while overall sales have risen a cumulative 31 percent, department store sales have plunged 17 percent, according to Commerce Department data.

According to Howard Davidowitz, chairman of Davidowitz & Associates, which has provided consulting and investment banking services for the retail industry since 1981, half the 1,100 U.S. regional malls will close over the next decade.

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TOO MUCH

A surplus of stores are fighting for survival as the ubiquitous discount signs attest, he said.

“When there is too much, and we have too much, then the only differentiator is price. That’s why they’re all going into bankruptcy and closing all these stores,” Davidowitz said.

The crunch in the CMBS market means holders of non-performing debt, such as pensions or hedge funds, stand to lose money.

The mall owners, mostly real estate investment trusts (REITs), have avoided major losses because they can often shed their debt through an easy foreclosure process.

“You have a lot of volume that won’t be able to refi,” said Ann Hambly founder and chief executive of 1st Service Solutions, which works with borrowers when CMBS loans need to be restructured.

Cumulative losses from mostly 10-year CMBS loans issued in 2005 through 2007 already reach $32.6 billion, a big jump from the average $1.23 billion incurred annually in the prior decade, according to Wells Fargo.

The CMBS industry is bracing for losses to spike as loan servicers struggle to extract any value from problematic malls, particularly those based in less affluent areas.

In January, for example, investors recouped just 4 percent of a $136 million CMBS loan from 2006 on the Citadel Mall in Colorado Springs, Colorado.

Investor worries about exposure to struggling malls and retailers intensified in August when Macy’s said it would close 100 stores, prompting increased hedging and widening spreads on the junk-rated bonds made up of riskier commercial mortgages.

Adding to the stress, new rules, set to be introduced on Dec. 24, will make it constlier for banks to sell CMBS debt. The rules require banks to hold at least 5 percent of each new deal they create, or find a qualified investor to assume the risk.

This has already roughly halved new CMBS issuance in 2016 and loan brokers say the packaged debt financing is now only available to the nation’s best malls. Investors too are demanding greater prudence in CMBS underwriting.

Mall owners who failed to meet debt payments in the past would just hand over the keys because the borrowers contributed little, if any, of their own money. The terms often shielded other assets from being seized as collateral to repay the debt.

Dodging the overall trend, retail rents for premier shopping centers located in affluent areas continue to rise. Vacant retail space at malls is at its lowest rate since 2010, according to research by Cushman & Wakefield.

The low vacancy rate reflects the ability of some malls to fill the void left by store closings by offering space to dollar stores and discounters.

That is, however, little consolation for investors.

“With the retail consolidation that we have ahead of us, malls have a fair amount of pain left to come,” Edward Dittmer, a CMBS analyst at Morningstar, said.

By Reuters in Fortune

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Retail Disaster: Holiday Sales Crater by 11%, Online Spending Declines: NRF Blames Shopping Fiasco On “Stronger Economy”

Last year was bad. This year is an outright disaster.  By Tyler Durden

As we reported earlier using ShopperTrak data, the first two days of the holiday shopping season were already showing a -0.5% decline across bricks-and-mortar stores, following a “cash for clunkers”-like jump in early promotions which pulled demand forward with little follow through in the remaining shopping days. However, not even we predicted the shocker just released from the National Retail Federation, the traditionally cheery industry organization, which just reported absolutely abysmal numbers: sales during the four-day Thanksgiving holiday period crashed by a whopping 11% from $57.4 billion to $50.9 billion, confirming what everyone but the Fed knows by now: the US middle class is being obliterated, and that key driver of 70% of US economic growth is in the worst shape it has been since the Lehman collapse, courtesy of 6 years of Fed’s ruinous central planning. 

Demonstrating the sad state of America’s “economic dynamo”, shoppers spent an average only $380.95, down 6.4% from $407.02 a year earlier. In fact, as the NRF charts below demonstrate, there was a decline across virtually every tracked spending category (source):

As the WSJ reports, NRF’s CEO Matt Shay attributed the drop to a combination of factors, including the fact that retailers moved promotions earlier this year in attempt to get people out sooner and avoid what happened last year when people didn’t finish their shopping because of bad weather.

Also did we mention the NRF is perpetually cheery and always desperate to put a metric ton of lipstick on a pig? Well, hold on to your hats folks:

He also attributed the declines to better online offerings and an improving economy where “people don’t feel the same psychological need to rush out and get the great deal that weekend, particularly if they expected to be more deals,” he said.

And of course the sprint vs marathon comparisons, such as this one: “The holiday season and the weekend are a marathon not a sprint,” NRF Chief Executive Officer Matthew Shay said on a conference call. Odd how that metaphor is never used when the (seasonally-adjusted) sprint beats the marathoners.

So there you have it: a 11% collapse in retail spending has just been spun as super bullish for the US economy, whereby US consumers aren’t spending because the economy is simply too strong, and the only reason they don’t spend is because they will spend much more later. Or something.

Apparently the plunge in Americans who even care about bargains is also an indication of an economic resurgence:

The retail trade group said the number of people who went shopping over the four-day weekend declined by 5.2% to 134 million, from 141 million last year.

Finally, what we said earlier about a surge in online sales, well forget it – it was a lie based on the now traditional skewed perspectives from a few self-serving industry organizations:

Despite many retailers offering the same discounts on the Web as they offered in stores, the Internet didn’t attract more shoppers or more spending than last year. Online sales accounted for 42% of sales racked up over the four-day period, the same percentage as last year, though up from 26% in 2006, the trade group said.

In fact, it was worse: “Shoppers spent an average $159.55 online, down 10.2% from $177.67 last year.”

But the propaganda piece de resistance is without doubt the following:

“A highly competitive environment, early promotions and the ability to shop 24/7 online all contributed to the shift witnessed this weekend,” Mr. Shay said.

So to summarize: holiday sales plunged, and Americans refused to shop because the economy is “stronger than ever” and because Americans have the option of shopping whenever, which is why they didn’t shop in the first place. That, and of course plunging gasoline prices leading to… plunging retail sales, just as all the economists “correctly” predicted.