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Investments

The death of the mall

Bond investors may want to rethink CMBS investments

January 24, 2014

Middle-class retailers JCPenney (JCP) and Sears (SHLD) are hurting for customers, and when they take a hit so do investors in commercial mortgage-backed securities. 

So this is what's happening in America.

When some of the oldest, big mall stores hit never ending struggles it is significant — reflective of larger economic trends derailing middle-class consumers, one of the largest home buying segments.

Whats more, retailer collapses like JCPenney and Sears are proving problematic for some classes of investors.

Trepp Analytics has been following the disturbing trend of large-box retailers like JCPenney and Sears closing down stores and losing customers. It’s not a pretty sight if you’re an investor in commercial-mortgage backed securities tied to one of the shopping malls or centers supported by lease payments from these anchor tenants.  

As Trepp notes, CMBS investors are watching the so-called Aiken Mall loan in Aiken, S.C. The $20.5 million loan landed with a special servicer three years ago and is now real-estate owned, Trepp points out.

Valued for $26.3 million back in 2006, the property is now valued under $7 million.

Making matters worse, Sears is closing its location in the embattled mall along with its automotive shop. Investors found this out in just the past week.

Jones Lang LaSalle manages the asset, and Trepp says the company’s goal was to get "all three anchor tenants renewed as they expire in the next 18 months." Sears was one of the key tenants, and now it’s out.

The other anchors include Belk’s and the struggling J.C. Penney. The Aiken property is 50% leased inline and 75% occupied, Trepp said. The loan in question accounts for 1% of the BSCMS 2007-PW15 deal.

Earlier this month, Trepp covered a note from Barclays research team, which said nine CMBS loans face potential impact from J.C. Penney store closings. In the note, analysts Keerthi Raghavan and Aaron Haan of the Barclays research team claim 33 JCP stores are on the line, and nine of the stores directly effect CMBS loans. In eight of the cases, the JCP store is part of the loan’s collateral.  

While the hit may be minimal at best, CMBS is definitely feeling some impact from shifting winds in the retail space.

However, from a broader economic perspective – with large-box retailers struggling and homeownership declining – perhaps, it's safe to say staples of middle-class life are dying a slow death…just like the suburban shopping mall.

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