CREFC speakers highlight the trouble with retail CMBS

A panelist at the CREFC conference in Manhattan this week noted that he had recently visited a retail store to get a feel for a certain cooking pan, only to order it on Amazon.com on his way out the door.

A panelist at the CREFC conference in Manhattan this week noted that he had recently visited a retail store to get a feel for a certain cooking pan, only to order it on Amazon.com on his way out the door.

It was telling that this individual, who was not a young man, had grown so comfortable with America’s largest online retailer that he would choose to order the product instead of buying it and taking it home right there on the spot.

amazon_stores
Amazon opened its first brick and mortar retail store in 2015

This mindset underscores the uncertain future of brick and mortar retail, as embattled stores continue to close, once-formidable retailers file for bankruptcy and enclosed malls suffer due to the loss of major retail tenants.

Retail was portrayed at the event as being among the most concerning of the main CMBS asset classes. The picture became gloomier when considering that retailers, particularly those in secondary and tertiary markets, have in the past relied heavily on CMBS, which has had a rough year.

Data presented at the event showed that 22 percent of major market retail is backed by CMBS financing, compared to 40 percent and 50 percent for the secondary and tertiary markets, respectively.

“This type of retail is going to have a high sensitivity to the availability of CMBS and there could be some real takeout issues,” said one speaker, representing a private lender that specializes in special situation investing.

Losses are piling up. CMBS 1.0 loans collateralized by retail have already experienced $3.2 billion in losses across 102 loans, according to data from Morgan Stanley.

While it’s well known that regional malls and department stores, once the lifeblood of retail, have suffered staggering losses, the data presented at the event was still eye opening for delegates, highlighting that the problem is systemic and that business models will need to change if traditional retailers intend to have a viable future.

Not a single department store today is indexing higher than it was back in 2006, the speaker noted, rifling through a number of stats showing the pronounced 10-year decline of major retailers: Nordstrom is at 95 percent, Macy’s at 89 percent, Bon-Ton at 64 percent, J.C. Penney at 63 percent and Sears at just 60 percent.

“Sears has fallen off the cliff and no one wants to think or talk about it,” he said. “They are at negative profit margins, meaning that they do not make any money.”

Meanwhile, as profits plunge and the stock prices of most notable retailers suffer, Amazon is sitting pretty with an 80 percent year-over-year increase in its stock price.

There’s no clean and cut remedy for traditional retailers and big boxers, though slowly but surely some are adapting to market changes and have had plenty of success with Internet sales.

E-commerce apparel sales are growing at 20 percent per year, and a majority of the top 15 sellers were traditionally brick and mortar stores, one panelist noted.

In addition, despite the negative connotations, major downsizing and the closure of more stores — by the hundreds — could help these retailers cut away some dead weight and potentially revamp their business models to accommodate a smaller brick and mortar footprint and boost online sales.

In an ironic turn of events, beginning last year Amazon began opening its first physical stores, signaling that a new business model has emerged and that traditional brick and mortar retail is, in fact, not dead.

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