By Al Barbarino
For many of us who grew up in suburban America, the local shopping mall conjures nostalgic thoughts of childhood. The Camillus Mall in the suburbs of Syracuse, New York had one of those centerpiece water fountains filled with loads of coins. I remember gazing into its shallow pools as a kid, the coins glistening underwater, thinking how rich I would be if I could just jump in and snatch them all up.
In hindsight, the willingness of people to blindly throw money away into a fountain that gave nothing in return said a lot about the prosperity and foot traffic that flowed through enclosed US shopping malls in the 80s and 90s. But as time passed, the so-called ultimate shopping experience at the Camillus Mall had become more like a stroll through a retail morgue. By the year 2000, the mall had all but died, as had many others in the area, including the nearby Fairmount Fair, the not too distant Fayetteville Mall and the Penn-Can Mall in Cicero.
Hundreds of malls have met — and will meet — the same fate as national anchor tenants continue to close stores by the hundreds. Mall investors, including those who have bought up commercial mortgage-backed securities tied to them, have suffered in turn.
“A lot of CMBS investors are weary after getting burned in the past,” says Paul Fitzsimmons, a managing director in the CMBS Group at Kroll Bond Rating Agency, referring to a wave of liquidated, pre-recession CMBS 1.0 mall loans.
Ten of the largest loans from that CMBS era alone, spanning nine US states, experienced an average loss severity of 76 percent, or about $625 million of their original $822 million balance, according to Trepp data.
Retail properties’ share of CMBS pools has also steadily declined in recent years, the data shows; they accounted for nearly 53 percent of CMBS pools in 2010, but that dropped to 43 percent by 2012/13 and stands at just 33 percent today. Meanwhile, the current retail CMBS delinquency rate, at 6.11 percent, is well above the 4.8 percent rate for all CMBS.
Post-recession CMBS (2.0 and beyond) mall loans are hitting the skids too, including a $50 million loan in special servicing backed by the Hudson Valley Mall in Kingston, New York, where JC Penney has vacated and Macy’s will close this year, part of CFCRE 2011-C1 (16.5 percent). And the underperforming Gateway at Salt Lake City loan, part of JPMCC 2010-C1 (29.2 percent), has led to various ratings downgrades.
Only a couple of once-thriving local malls remain in Syracuse, clinging to life. Special servicer C-III Asset Management now owns the Great Northern Mall in Clay. At the ShoppingTown Mall in Dewitt, anchor tenants JC Penney, Macy’s and Dick’s Sporting Goods have all departed, and a $50 million redevelopment plan has stalled due to an ongoing tax dispute.
The rise of e-commerce, demographic issues and economic problems are all partially to blame. In Syracuse, the biggest blow came back in October 15, 1990, when the Carousel Mall (today called Destiny USA) opened after much fanfare and debate. The six-story super-regional shopping and entertainment complex continues to grow and has remained the largest and most frequented mall in the arguably ‘overmalled’ city, while others suffered, died, or were transformed into outdoor strip centers.
That pattern has occurred in cities across the country. Experts tell me that dying malls can reinvest and reinvent themselves if they wish to compete, and that retail CMBS is stable despite the distress; there will always be a place for premier malls in central locations with a good mix of national tenants, entertainment and dining options, they say.
But I’m not so sure. I won’t be surprised to see the demise of Destiny USA in another decade or two, as e-commerce reaches new peaks and new forms of shopping we haven’t even imagined yet begin to emerge. When Destiny dies, top-tier malls across the country will fold too. At that point retail CMBS will live on, barring some broader CMBS implosion. But CMBS tied to malls will become a thing of the past, and investors may learn that they unwittingly threw a few too many coins into the pool before they could snatch them out.
Al Barbarino is editor of recapitalnews.com