Owners of the nation’s malls, retail plazas and Main Street storefronts are sounding alarms over the magnitude of the financial wreckage in store for the U.S. economy as efforts to contain the coronavirus appear destined for a prolonged slog.

The clearest sign to date of the pandemic’s potential to inflict deep and long-term damage was made clear as details emerged last week about thousands of so-called Watch List loans. The disclosures are a monthly ritual on Wall Street to keep investors in commercial mortgage-backed securities apprised of the health of the properties backing their portfolios.

Nearly 700 retail properties ranging from strip malls to stand-alone big-box stores were slapped with the “Watch List” moniker between March 15 and April 15, as the nation rolled out shelter-in-place policies and saw waves of business closures to combat the Covid-19 outbreak. The increase in CMBS properties flagged for concern marked a 45% increase over the number of Watch List retail properties recorded a month earlier.

In South Florida, the number of Watch List retail loans increased by six over the past month to total 34 on April 15. That was a combined $385 million in loans. Borrowers on the Watch List included the owners of major retail properties, including The Falls in Miami, the Shops at Sunset Place in South Miami and Cross County Plaza in West Palm Beach. All of these borrowers were current on their loans as of the reporting date.

The Watch List label is used by administrators who manage CMBS portfolios to highlight a range of situations — the loss of a tenant or a missed mortgage payment, for example — that might threaten the health of a property’s underlying loan. For the first time since the coronavirus landed in the United States, stress from its economic fallout was front and center in the updated loan-servicer notes attached to Watch List loans.

Well before the pandemic started, big changes were coming to the Falls. Bloomingdale’s was about to close and Life Time agreed to build a fitness center to replace them. The fitness center wasn’t slated to open until 2022. The other two large tenants at the Falls, Macy’s and Regal Cinemas, were forced to close by COVID-19.

Further north, the Shops at Sunset Place was placed on the watch list before the pandemic began because of declining vacancy and revenue, according to the loan servicer notes.

“Occupancy decrease from 88% at year-end 2018 as a result of several tenants vacating, the largest being Shiver Entertainment,” the loan servicer stated in the notes. “There is a strong temporary leasing program in place. Largest tenant, AMC Theaters renewed until 12/31/23. Occupancy has increased to 83% as of 9/30/19 due to several new tenants.”

Barnes & Noble, LA Fitness and Restoration Hardware are the other large tenants in Shops at Sunset Place.

In 2019, Shops at Sunset Place co-owners Federal Realty Investment Trust (NYSE: FRT), Grass River Property and Comras Co. obtained approval to redevelop part of the mall into hotel rooms and apartments. Construction has yet to take place. The mall owners couldn’t be reached for comment.


The prognosis for the retail sector was less-than ideal heading into the coronavirus economy, and it’s positioned only to worsen, said Victor Calanog, Moody’s Analytics head of commercial real estate economics. In a recent briefing, Calanog said Moody’s was updating its worst-case outlook for the U.S. retail sector, predicting space vacancies to rise from roughly 10% prior to the pandemic to 13% by year end and to 15% in 2021.

“It will be hit relatively hard compared to other property types very quickly,” said Calanog, adding that by one measure 90% of U.S. retailers had sought rent relief as of the third week of March.

That was the narrative unfolding at the Audubon Crossing shopping plaza in Audubon, New Jersey. Loan servicer notes made available April 15 indicate the property’s owner, Wolfson Group Inc. of Plymouth Meeting, Pennsylvania, requested a 90-day deferral on all loan payments beginning May 1. The 450,000-square-foot property, home to a Walmart Stores Inc. location, backs a $40.7 million loan with a monthly debt-service obligation of approximately $276,000.

The property’s loan servicer said Covid-19 was to blame.

Steven Wolfson said Audubon Crossing’s problems are no different than what’s happening across the rest of Wolfson Group’s portfolio. He said 60% to 70% of his tenants have sought rent concessions, worse than what he experienced during past economic crises, including the 1990s savings-and-loan scandal, the 9/11 terrorist attacks and the 2008-09 recession.

“What’s going on right now … you can add them all together and it’s still not as bad as what’s going on right now,” Wolfson said.


Kelsie Marian, an analyst with Gartner Inc. who advises retailers on space and strategy, wrote in a recent research note the industry’s risks fall into three key buckets: order fulfillment at time when supply chains are compromised; pricing and sales at a time when margins already are compressed; and workforce management at a time when unemployment and displacement are skyrocketing.

Marian said retailers who fail to find sustainable solutions to each of those challenges will lose market share to more nimble, digitally savvy competitors.

Moody’s Calanog offered similar predictions, adding that the coronavirus has triggered three likely trends that will shape the sector long after the virus is contained. First, he said online retailing will be turbocharged for all vendors, including those who have held out until now. Second, brick-and-mortar locations will be be retrofitted to accommodate a more “experiential” shopper and, subsequently, smaller crowds. And third, Calanog foresees the potential for dense urban shopping areas — think New York’s Fifth Avenue — to fall out of favor and thus further compress real estate prices.

“If tourists do not come back at the levels they once did and if households begin favoring less-dense urban areas … then we wonder if this spells the end for specific retail corridors to charge exorbitant rents,” he said.

Steven Wolfson said he has not laid off any of his 20 employees and that he believes Wolfson Group is well positioned to weather the storm due to a healthy smattering of grocery and food-services tenants who are doing better than usual. He said life will be slow to return to normal, conceding that it does not bode well for the bars, movie theaters and full-service restaurants who lease space at his properties. Like Marian and Calanog, he predicted some will have it worse than others.

“I don’t have an answer to everything. I’m just a guy who grew up in a row house in Brooklyn. But we will survive this,” Wolfson said. “But if you are a B, C or D mall property, you’re done. It’s over.”


Source:  SFBJ

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