Despite recent signs of stabilization, underperforming CMBS retail assets in secondary and tertiary markets will face a slow recovery going into 2016 if retailers experience a weak holiday season, according to Fitch Ratings.
Though the US Department of Commerce’s measure of all retail sales reported that September’s sales have risen by 2.4% year over year, Fitch expects that retail holiday sales will be up between 3.0%-4.0% compared with last year’s 4.1%.
Store closings have already been frequent so far this year, including names like The Gap, Family Dollar, Dollar Tree, Dollar General, Macy’s, Office Depot/Office Max, American Eagle, and Golf Galaxy.
Disappointing sales and/or pressure on labor costs due to minimum wage hikes (launched in the spring) could lead to additional store closings, particularly in underperforming locations in class B and C malls, according to Fitch.
Retail delinquencies are lagging the rest of the CMBS market, climbing 39 bps over the past 12 months compared to an overall 31 bps delinquency rate decline. Additionally, retail assets have been the slowest to refinance.
However, while 2Q15 CMBS retail vacancy declined to a new post-recession low, rents grew by a tepid 0.6%. And modest construction activity “will help support rental rates, as it will ensure that the amount of available mall space is prudent.”
The ratings agency noted earlier this year that retail loans falling into special servicing typically back malls in weaker secondary or tertiary markets, especially malls suffering from the departure of an anchor tenant.