Shifting Retail Landscape Poses Big Questions for CMBS Borrowers and Lenders - HubSpot
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March 2015
CRE Research
Shifting Retail Landscape Poses Big Questions for
CMBS Borrowers and Lenders
Trends
Online shopping has placed brick and mortar which often drives business online despite the
retailers in a unique position. The convenience purchase decision being made in a physical store.
of straight-to-your-door services and a nearly
A barbell effect seems to have taken hold in
infinite selection has curbed the appetite for
retail property investment, as large retail REITS
physical stores, but the demand to see, feel, and
are shedding underperforming assets and
touch a product is still at the core of the retail
pumping money into high-end luxury malls and
experience. Tech integration, on top of the overall
storefronts in urban “high street” retail areas.
transition to sustainability, has put pressure on
On the other end, grocery stores, pharmacies,
retailers and property owners to upgrade and
discount retailers, and other consumer essentials
redesign facilities with integrated technology to
tenants that anchor smaller retail properties are
draw customers away from their screens and
performing fairly well. Second tier regional malls,
into stores. Rather than use stores like small
the power centers built more than thirty years
inventory warehouses, retailers are shifting more
ago that are anchored by beleaguered big box
toward the showroom and omni-channel models.
tenants like JC Penney, Sears, and Best Buy,
Retail stores are now just one part of the are the properties suffering the most. It is these
purchase process, which has grown to include properties that are causing the most damage
online connectivity, brand engagement through to legacy CMBS loans, as large parcels slowly
social media, and experiential flagship stores. become vacant.
Landlords are increasingly redeveloping retail
properties to cater to the expanded technological
Historical Performance
needs of tenants and, in many cases, their lower
square footage requirements as a result of having
For the most part, delinquency rates have settled
less inventory on premises. Retailers themselves
down since the wild effects of the financial
are grappling with performance measurements
crisis hit the market. Trepp’s rate for retail loan
of brick and mortar stores under this new model,
delinquencies in February was 5.38%, down
www.trepp.com 1CRE Research March 2015
22 basis points from January’s rate and 286 of the maturing balance will come from loans
basis points from its peak in March 2012. Retail backed by retail properties. Loans that are current
delinquencies recovered more rapidly than now may end up defaulting as they near maturity
other major property types, as special servicers and borrowers assess their sale or refinance
were faster to cut their losses and foreclose on options.
distressed retail properties, as opposed to the
When the maturing retail loans are broken
‘extend and pretend’ approach taken with a lot
down by the underlying properties’ reported
of large office and multifamily loans during the
occupancy rates, a quarter of the loans provide
slow recovery. The office delinquency rate, by
cause for concern with regards to their tenancy.
comparison, was 6.15% in February.
Higher vacancy rates lead to lower income and
This year is the first of the oncoming ‘wave of ultimately lower valuations, possibly causing
maturities,’ which is the more than $300 billion trouble for these loans when it comes time to
of 2005 through 2007 vintage 10-year loans due refinance.
to mature over the next three years. Nearly 30%
Figure 1. Retail Delinquencies Figure 2. Volume of Loans Maturing
8.50%
140 26.45%
8.00%
$ Billions
28.42%
120
7.50%
100
7.00%
80 29.43%
6.50%
60
6.00%
40
5.50% 17.77%
20 30.87% 48.86%
5.00%
0
4.50%
2015 2016 2017 2018 2019 2020
1/10
5/10
9/10
1/11
5/11
9/11
1/12
5/12
9/12
1/13
5/13
9/13
1/14
5/14
9/14
1/15
Maturing Loans (excld. retail) Retail Loans Maturing
Figure 3. Occupancy of Maturing Retail Loans
100% 100
80% 98
60% 96
40% 94
20% 92
0% 90
2015 2016 2017 2018 2019 2020
0-49 50-74 75-84 85-89
90-94 95-99 100 Avg Occ
www.trepp.com 2CRE Research March 2015
To get a clearer picture of what losses may look of foreclosure, so it is highly likely that these
like as the wave of maturities hits, we look to properties will report losses upon disposition.
the status of the loans coming due from now An additional 2% of 2015 maturities are currently
until 2017. Of the maturing retail loans, 7.93% with the special servicer. Another 7% and 7.7%
are current but have been assigned appraisal of 2016 and 2017 retail maturities are already
reduction amounts (ARAs), while 7.68% are delinquent, respectively.
delinquent with an ARA. ARAs can serve as both
Historically, average loss severity on retail
a warning and estimate on the level of losses
dispositions has been volatile due to varying
that may result based on the borrower’s missed
maturities, prepayments, foreclosures, and
principal and interest payments. Looking at 2015
the overall state of the commercial real estate
retail maturities alone, over 14% were reported
market. Over the last ten years, 19% of retail
as delinquent in February. The majority of the
loan dispositions resulted in a loss, with an
delinquencies are either REO or in the process
average loss severity of 51.55%.
Figure 4. Wave of Retail Maturities Figure 6. Maturing Retail Delinquencies
6.0 4.5
$ Billions
5.0
$ Billions
4.0 4.0
3.0 0.24%
3.5
2.0 2.82%
1.0 3.0
0.0 3.24%
2.5
12/15
12/16
12/17
3/15
6/15
9/15
3/16
6/16
9/16
3/17
6/17
9/17
1.27%
0.27%
Current Delinquent Current w/ ARA Delinquent w/ ARA 2.0 3.07%
4.26%
1.5
Figure 5. Losses on Disposed Retail Loans 10.07%
1.0
7.19%
4.0 75% 5.82%
0.5
$ Billions
3.0 60%
45% 0.0
2.0 2015 2016 2017
30%
1.0 REO Foreclosure
15% Non-Perf BydMat 90+ Days
0.0 0% 60 Days 30 Days
Loans w/ Spc Srv
12/10
10/11
11/13
2/10
7/10
5/11
3/12
8/12
1/13
6/13
4/14
9/14
2/15
Disposed w/o Loss
Disposed w/ Loss
6 per. Mov. Avg. (Loss Severity)
www.trepp.com 3CRE Research March 2015
New Issuance Interest-only loans have made up a growing
proportion of new retail origination over the last
Issuance of retail loans in CMBS has been
year. In general, IO terms are considered riskier
trending upward since the recession despite
than amortizing loans that that pay down principal
a slight drop in 2014. Beginning in 2012, single
over their term.
asset/single borrower deals accounted for a
growing proportion of annual issuance. The large The loan-to-value ratios on loans being issued
trophy type assets or portfolios financed by these also serve as a good measure of where
deals, paired with their relatively easy-to-analyze underwriting standards are in the market. In
structure, made them more appealing to wary the case of retail loans, weighted average LTVs
CMBS investors. Growing use of this deal type don’t give much away, but it does appear that
also supports the theory that the capital markets lenders are originating loans at slightly higher
are shifting their assets toward high-end, luxury, leverage points so far in 2015. One reason LTVs
prime-location retail properties. may be staying fairly flat is a coinciding drop
in capitalization rates. Cap rates measure net
As more capital enters the market and lenders
operating income (NOI) in relation to property
compete harder for lending assignments,
value, so the downward trend in cap rates implies
underwriting standards are on the radar of
that property values are increasing for the same
investors and ratings agencies. One measure
amount of NOI.
of underwriting standards is the percentage of
interest-only (IO) loans being originated in CMBS.
Figure 7. Retail Issuance by Deal Type Figure 8. Retail Amortization Types
30 100% 8.0
$ Billions
$ Billions
22.8% 22.2% 19.5%
% of Amort. Tpye
25 80% 35.1%
48.6% 6.0
21.9%
20
60% 32.1%
48.0% 4.0
15 28.1%
40%
10 35.8%
58.6%
45.7% 2.0
5 20% 36.8%
29.2%
15.6%
- 0% 0.0
2010 2011 2012 2013 2014 2015
YTD Interest Only Partial IO
Conduit Large Loan SnglAsset/Borr
Amortizing Volume (RHA)
www.trepp.com 4CRE Research March 2015
Many middle-of-the-market malls continue
Figure 9. Weighted Average LTV & Cap Rates
to underperform, some of which have gone
70.00 7.10%
completely dark, while high-end shopping
7.00% centers benefit from access to capital and higher
6.90% foot traffic. Simon Property Group’s recent
65.00 6.80%
6.70% bids for Macerich may point to a trend toward
60.00 6.60% consolidation in the retail REIT market that could
6.50%
advance the process of culling underperforming
6.40%
55.00 6.30% assets and investing in high performing
2014Q1 2014Q2 2014Q3 2014Q4 2015Q1TD
properties. Ultimately, owners and tenants will
WtdAvgLTV AvgCapRate
have to revitalize space by integrating technology
to enhance consumer engagement and compete
Outlook with online outlets with less overhead.
Rents in urban markets soared last year and The high volume of retail loans coming due
will remain competitive as the move toward over the next three years will lead to increasing
urbanization continues and millennials stay new CMBS origination in this space. However,
unmarried and live in cities longer than the many of the properties up for refinancing will be
generation before them. Large anchors in malls reappraised in a retail environment very different
continue to struggle to stay relevant, and many from what it was ten years ago. Depending on
staples in the industry have either faded, like the landscape in the next five years, this could
Sears, or fallen, like RadioShack. Now, both put pressure on borrowers to contribute more
companies are trying out the store-within-a-store capital or sell properties at discounted values.
model, with Sears carving up parcels to sublease
unnecessary space, and RadioShack teaming up
with Sprint to lower expenses and better utilize
their existing square footage.
For inquiries about the data analysis conducted in this research, contact press@trepp.com or call 212-754-1010.
For more information about Trepp’s commercial real estate data, contact info@trepp.com.
About Trepp
Trepp, LLC, founded in 1979, is the leading provider of information, analytics and technology to the CMBS, commercial real estate and
banking markets. Trepp provides primary and secondary market participants with the web-based tools and insight they need to increase
their operational efficiencies, information transparency and investment performance. From its offices in New York, San Francisco and
London, Trepp serves its clients with products and services to support trading, research, risk management, surveillance and portfolio
management. Trepp is wholly-owned by dmg b2b, the information publishing division of the Daily Mail and General Trust (DMGT).
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