Loans come due as brick-and-mortar stores struggle
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March 13--In October, Morningstar Credit Ratings released a national report listing potentially troubled malls that had been used to back loans bought by investors.
The only mall in Pennsylvania to make the list -- and ranking second in terms of the projected loss of about $125.5 million -- was the Galleria at Pittsburgh Mills in Frazer.
That same mall went on the auction block in January and sold for $100. The successful -- and only -- bid was made on behalf of the group of lenders who had taken control of the property after Wells Fargo Bank foreclosed on the sprawling shopping center along Route 28 in 2015.
As more shoppers drift away from traditional malls, owners of struggling properties increasingly have been handing them over to their lenders rather than sink more resources into anemic shopping centers.
That spells trouble for loans that are backed by malls. Those loans -- dubbed commercial mortgage-backed securities or CMBS loans -- are suffering.
In the case of commercial mortgage-backed securities, the mortgages on retail properties, apartments, office buildings and other commercial properties are bundled into packages and sold to investors.
Many of these loans -- which were most popular about 10 years ago during the height of the nation's real estate boom (and before the crash a few years later) -- are coming due at a time when the retail industry is reeling from brick-and-mortar woes.
And as CMBS loans mature, some weaker properties could have trouble refinancing. That could put pressure on property owners who need to, say, find a partner or additional revenue to stay afloat.
And those individuals who have invested in CMBS loans may see a loss on their investment.
Since 2010, liquidations of regional malls amounting to $3.89 billion led to $2.88 billion in CMBS losses, a 74 percent loss severity, according to Morningstar Credit Ratings.
Meanwhile, a wave of loan maturity is on the horizon as loans issued between 2005 and 2007, when this funding was most popular for commercial properties, comes due.
About $2.82 billion in mall-backed CMBS loans are scheduled to mature through 2017, Morningstar(MORN) said.
"Class B malls in secondary or tertiary markets, like the Pittsburgh Mills, are not able to produce the return on capital to justify investment from their owners," said Steve Jellinek, vice president, CMBS at Morningstar Credit Ratings. "If owners don't want to invest, that increases the vacancies on the property.
"When the loans on those properties reach maturity dates, the property values can't withstand the mortgage," he said. "What you have is the owners are unwilling to fund additional cash to refinance the loan, so they allow the loans to default."
After the financial crisis in 2008, CMBS loans faced a crack down.
Lenders took a more narrow view of what kinds of properties they would dole money out to. That means many properties that were financed by these loans a decade ago might not make the cut today under the new criteria.
Domino effect
In general, there are a lot of reasons why enclosed malls have been flailing in recent years. Each development has its own story.
Overall, online shopping is siphoning money from brick-and-mortar stores. And shoppers are spending their money on experiences and gadgets, rather than the latest pair of jeans. In another blow, consumer spending is moving further away from discretionary items toward things like health care, education and housing, according to Deutsche Bank(DB).
Thus, big department stores like J.C. Penney(JCP), Macy's(M) and Sears(SHLD) -- among the names that frequently serve as mall anchors -- have announced plans to cut stores.
Meanwhile, a number of retailers that often take up smaller storefronts inside the mall, like the Limited Inc., and Aeropostale(AROPQ), have been among those who recently have declared bankruptcy.
When an anchor store goes dark, it can be damaging to a mall. For one thing, the loss of a big tenant cuts foot traffic. It also could trigger lease clauses for other mall retailers, allowing them to renegotiate or terminate their leases.
Though a stronger mall might be able to fill the vacancy, in weaker malls "it's harder to back fill space," Mr. Jellinek said. "And where you have the loss of larger tenants or department stores, that starts a domino effect."
Deutsche Bank (DB) counts more than 13,100 stores that have closed between 2007 and 2017, equating to nearly one-quarter of the original 2007 store base.
"Given the persistent apparel challenges and negative mall traffic trends, we believe store closures should accelerate in 2017 and beyond," Deutsche Bank(DB) reported.
And the country has a lot of malls.
In its February report, Deutsche Bank(DB) said there are about 1,050 shopping malls in the United States, citing data from the World Economic Forum, a figure "well above other national averages, translating to five times more square feet of retail space per capita than any other country."
"The World Economic Forum expects 15 percent of these malls to close over the next decade, with lower grade malls ... at most risk."
Standards tightened
Among the CMBS loans that Trepp LLC tracks, New York City is expected to see the largest amount of debt mature in the next six months, with $12.6 billion behind properties coming due.
"Including loans that have recently fallen past maturity, there has been a considerable increase in the percentage of loans that are seriously delinquent or have been transferred to special servicing among the New York City and Washington, D.C. [metropolitan statistical areas]," Trepp, a New York City market research firm, reported this month.
CMBS loans are still used as a funding tool. It's just that the standards have been tightened.
Trepp counted four recent loan issuances in the Pittsburgh region -- Plaza at the Pointe, North Fayette; Comfort Inn & Suites, Pittsburgh; Franklin Village Shopping Center, Kittanning; and Shoppes At Cranberry Commons II, Cranberry.
Generally, recent loan terms are more conservative than they were a decade ago.
"Since the real estate bubble burst, properties are just not able to land a 10-year loan without solid credit standards," said Sean Barrie, a research analyst with Trepp. "This day and age, you can't really afford to have poor credit standards in CMBS loans."
Some of the largest CMBS loans in the Pittsburgh region tracked by Trepp include U.S. Steel Tower, The Waterfront, and Station Square.
Brick-and-mortar struggles
Still, some area properties have hit a wall.
For example, among the properties that Trepp tracks, Stone Quarry Commons, a shopping center in Monaca built in 2007, is listed as going through a foreclosure process, which means that the process hasn't been finalized and the loan could be modified. Another Monaca retail center on Golf View Drive is listed as real-estate owned, meaning the lender took control of it.
Though the troubles of the brick-and-mortar world hit the Pittsburgh Mills mall, too, the retail development along Route 28 has had its own challenges since opening in 2005.
The 1.1 million-square-foot mall originally was developed as a partnership between Johnstown-based Zamias Services Inc. and Mills Corp., a Virginia-based firm that filed for Chapter 11 bankruptcy protection in 2007.
Mills Corp. had a reputation of building sprawling outlet centers throughout the country -- called "shoppertainment." For instance, Arundel Mills in Maryland featured a Medieval Times Dinner & Tournament, for those who want dinner and a joust after spending an afternoon of retail therapy.
But the Pittsburgh Mills in northern Allegheny County represented the Virginia company's first attempt at developing a full-price shopping center.
"Customer traffic never met expectations, and the mall's mix of shopping and entertainment never took hold," Morningstar(MORN) reported.
As of January, the property was 55 percent occupied -- down from just 75 percent in 2012, according to documents from Trepp.
Wells Fargo (WFC) had said it was owed $142.9 million when it officially bought the property at auction. Now, the bank can either rehabilitate or sell the mall on its own terms.
Stephanie Ritenbaugh: sritenbaugh@post-gazette.com or 412-261-4910.
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