May 13 2020

Mall Rats

I suppose it’s all in how you define “normalcy”.

This is a piece that’s about the coming collapse in Commercial Real Estate of all types but especially in Retail Spaces and Shopping Malls.

Ok, that mostly hurts faceless companies you’ve never heard of unless you hate Mr. Bucksbaum as much as I do, however the big cause is that Brick and Mortar Retail is sinking like…

Well, a Brick.

But it also has a part about the Name Brand Retailers who will probably not emerge unscathed and you may be quite disappointed by the casualties. I for one mourn J.C. Penney’s because they have great Hawaiian Shirts and I’ve finally figured out an underwear size that fits.

US Commercial Real Estate Prices Plunged in April, Mall Prices Collapsed
By Wolf Richter, Naked Capitalism
May 12, 2020

The Price Collapse of Mall Properties Will Continue Because Tenants Are Collapsing

Retail properties have been in a terrible mess for years, as their brick-and-mortar tenants succumbed one after the other to ecommerce. This has already wiped out categories such as CD and video stores, and it is wiping out the icons of American shopping: department stores and clothing stores, with some of the biggest chains having already gotten dismembered in bankruptcy court, including Sears Holdings. And even the survivors have shed tens of thousands of stores over the past three years, as “zombie malls” became a meme on the YouTube.

Now come the lockdowns, and the whole process that would have taken a few more years to play out is condensed into weeks and months. This is reflected in the 45% collapse of prices at mall properties since 2016, amplified by the 20% plunge in April.

The list of retailers now on the verge of filing for bankruptcy or having already filed since the lockdowns is getting longer by the day, as is the list of retailers that have announced permanent store closings since the lockdowns began.

This morning, Stage Stores with over 700 stores announced that it filed for Chapter 11 bankruptcy and plans to liquidate unless it can find a buyer.

Neiman Marcus, a luxury department store that last year still had 45 Neiman Marcus and Bergdorf Goodman stores and 24 Last Call stores, filed for bankruptcy last week, latest chapter in a long saga that now involves $5 billion in debt that resulted from a leveraged buyout in 2005 by private equity firms Warburg Pincus and TPG. They sold the retailer in 2013 to Ares Management and the Canada Pension Plan Investment Board (CPPIB) for $6 billion. Ares and CPPIB have been pummeling creditors with the threat of a bankruptcy filing since early 2017 in order to push them into a debt restructuring where they’d get a large haircut. Now they did.

J.C. Penney is preparing to file for bankruptcy as soon as this week and plans to permanently close about a quarter of its 850 or so stores, sources told Reuters last week. The company missed a $17-million debt payment last Thursday; its grace period expires this Tuesday and would trigger a default. It had already missed a $12-million debt payment on April 15; that grace period expires this Friday. J.C. Penney has long been on my list of bankruptcy candidates, causing me to write in July last year, I’m in Awe of How Long Zombies Like J.C. Penney Keep Getting New Money to Burn. But Bankruptcy Beckons.

Lord & Taylor, which has 38 department stores, said last week that it plans to liquidate its inventory once the lockdown allows it to reopen the stores as it will likely file for bankruptcy where it expects that its remaining assets will be liquidated.

J.Crew Group, which was subject to a leveraged buyout in 2011 by PE firms TPG and Leonard Green & Partners, filed for bankruptcy last week and hopes to avoid liquidation, after having come to an agreement with its creditors to reorganize its debts. Creditors will get 82% of the new company. These types of reorganizations lead to many stores being shuttered, and usually end up back in bankruptcy court for liquidation. Brick-and-mortar retailers are devilishly hard to restructure successfully.

Nordstrom, which has a thriving ecommerce business that was already over one-third of its total revenues before the lockdowns, announced last week that it is planning to shutter 16 of its stores.

It has been an intense litany that will continue. Tenants’ collapsing and disappearing one after the other without replacement has a pernicious impact on property prices. The whole CRE sector of mall properties will have to restructure, and much of it will have to be repurposed, and lenders and holders of commercial mortgage-backed securities will have to take their licks – but instead of having many years or even a decade to deal with it, hoping to get out of them before it happens, they’re caught up in it right now.