Macy’s closures could ravage US malls and associated CMBS

Plans to close 36 Macy’s stores by early spring could spell death for more than a dozen malls and cause hundreds-of-millions of dollars in losses for the CMBS deals tied to them.

Plans to close 36 Macy’s stores by early spring could spell death for more than a dozen malls and cause hundreds-of-millions of dollars in losses on the CMBS deals tied to them.

According to a new report from Morningstar Credit Ratings, the closures could affect $530 million of allocated CMBS property balance.

The ratings agency identified (see chart below) 13 CMBS loans with exposure to collateral and non-collateral stores slated for closure, seven of which are in special servicing, anticipating more than $260 million in losses on six of the loans in the event of liquidation.

“Stores in weak or declining malls could continue to deteriorate in performance, especially if they are in declining or stagnating demographic areas,” Morningstar stated in a new report, adding that “co-tenancy provisions and reduced mall traffic can ignite a downward spiral in revenue and sales.”

dead-mall
A fallen American mall

Such provisions entitle tenants to a rent reduction if key tenants — or a certain number of other tenants — leave the space. Some tenants may also have lease termination options related to the malls’ sales thresholds.

Macy’s, a tenant at properties securing 140 CMBS loans with more than $18.51 billion in unpaid principal balance, announced the closure plans in September due to slumping sales after a “challenging” holiday season.

The store closures are a product of today’s shifting retail climate. Morningstar analyst Bridget Weishaar said further store closures will likely be necessary to reflect shifts toward online shopping, noting that “Macy’s is taking all the right steps to rightsize its store base and to become more nimble” amid competition from online retailers.

By November 2015, estimated total department store market share had fallen to 3.6% from 4.8% as a percent of total retail sales during the last five years, according to Commerce Department data compiled by Weishaar. From 2010 through 8 Sept., 2015, Macy’s closed 52 stores and opened 12.

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