Image Image Image Image Image Image Image Image Image Image
Scroll to top

Top

No Comments

Retail Vacancy Becoming More than Just a Class C Mall Issue

Retail Vacancy Becoming More than Just a Class C Mall Issue

Other Segments, Including Power Centers and Specialty Centers, See Vacancy Increase for First Time in Five Years

Store closures have been the talk of the retail industry over the first four months of the year, with Sears-Kmart, JCPenney and Macy’s announcing more than 64 million square feet of combined closures since the start of 2017 and at least 10 major inline retailers filing for bankruptcy court reorganization or auction.

While the majority of retail property continues to perform well, the spate of department store closings has been largely confined to retailers’ under-performing locations, with the impact on centers that can least afford losing them.

However, the vacancy rate also ticked up for malls in some of the srongest locations in the country, based on CoStar’s proprietary Location Quality Score (LQS). CoStar is also showing vacancy increases in power centers and specialty centers.

As a result, first-quarter retail vacancies have started to increase in certain retail segments for the first time in five years, according to CoStar Group research.

“While these store closings have been generalized as Class C mall problems, CoStar research indicates that this is not necessarily a fair representation,” said Ryan McCullough, managing consultant at CoStar Group. “It is not just the C malls that are suffering — the bulk of mall closures are in B malls, to the tune of 17 million square feet. Furthermore, about half of this combined square footage will impact non-mall properties, including power centers, community centers, and downtown storefronts.”

The latest financial results also show malls typically classified as B properties being the first to be experiencing declines in net operating incomes.

CoStar Group analyzed NOI results on more than 2,400 CMBS-related loans with an outstanding loan balance of $38.6 billion. In a good sign for the overall retail property segment, those results show that the most recent NOI is up about 0.16 percentage points from the last full year reported NOI.

However, one segment saw a decline in NOI. Retail properties with outstanding loan balances of $50 million to $100 million saw NOI decline by 0.05 percentage points.

The NOI analysis of CMBS-related loans also found that about 42% of properties had an improved debt service coverage ratio (DSCR), or the amount of money left to cover required monthly debt and principal repayments. These retail properties posted strong DSCRs, improving their ratios by about 25%. Only about 4% of these properties were in the $50 million to $100 million loan balance category.

At the same time, 27% of properties showed that their most recent NOI resulted in a decreased DSCR. For these properties, the ratio dropped about 9%. A slightly larger number of properties with loan balances of $50 million to $100 million fell into this category, about 6%.

Stress Showing Up in Delinquent Loan Payments

According to Fitch Ratings, retail loan delinquencies edged up slighting during April from 5.55% to 5.59% month to month.

The four-basis point increase in the retail delinquency rate was due to $237 million of new delinquencies compared to $209 million of loan resolutions during the month, as well as a shrinking overall retail denominator (declined by $238 million), the ratings agency noted.

The largest new retail delinquencies were the $25.2 million loan back Somerset Crossing in Gainesville, VA, and the $23.4 million loan backing Rio Norte Shopping Center in Laredo, TX, both of which defaulted at their April 2017 maturity date.

Mark Heschmeyer, CoStar

Tags

Submit a Comment