Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.

The divide between good malls and bad malls is about to widen even further.

Despite popular belief, not all malls are dying. The highest quality shopping centers are minting money as a dearth of high-end properties drives up rents for the best locations. The Zombie Mall Apocalypse trope better describes a much larger group of middling-to-poor malls that are, in fact, in need of salvation -- or a wrecking ball.

Things are about to get even harder for the latter group of properties in the coming year, as the bill comes due on a credit binge that began in the heady, pre-financial-crisis days of 2006 and 2007. 

Retail Share
Non-agency CMBS issuance has fallen steeply in the first half of 2016, far from its peak in 2007
Source: Trepp

Most of these mall owners took on 10-year loans to buy malls and other retail properties, back when many U.S. consumers and businesses alike were living large on debt. That batch of loans backed by retail properties, worth around $50 billion by some estimates, which were bundled up and securitized into commercial mortgage-backed securities, are now set to come due. 

After the office segment, retail has the highest amount of CMBS maturing in 2017 currently in special servicing -- which usually means borrowers have already missed a payment or are otherwise facing issues that could impact loan performance -- according to CMBS research firm Trepp.

Nearly all of those loans are accompanied by big balloon payments due in 2017 and 2018 (some borrowers have already pushed their due date back a year to buy more time), which could make it harder for borrowers already on shaky ground to make good. 

Coming Due
The share of CMBS loans that are already behind on payments is higher in the next two years for retail
Source: Trepp
Note: 2018 has large exposure to loans that were due in 2017 but have already been pushed back a year to give the borrower more time.

Special servicing isn't necessarily a death knell. In the current low-interest-rate, high-liquidity market, thriving mall owners with access to capital can renegotiate terms or refinance loans. It's the owners of weaker malls that are going to run into trouble, further widening the divide between the healthy and unhealthy malls.

Report Card
Strong malls have traits that separate them from weak ones. These will only become more important as real estate loans come due
Source: Moody's Investors Service
*Occupancy cost reflects the ratio of how much a mall tenant pays in real estate costs -- such as rent, insurance and taxes -- to the tenant's total gross sales.

And there's another quirk to this story: Even mall operators with cash to pay their loans may strategically decide to walk away from poorly performing malls and retail properties no longer worth keeping. The trouble for many malls is they weren't built in central business districts or major cities, where the underlying real estate is valuable. Once the business model of a mall in the hinterlands stops working, then the value of its underlying property starts to approach zero, according to Moody's analyst Robb Paltz.

Take General Growth Properties, a $26 billion company by market cap, whose shares have risen by 15 percent this year. The second-biggest U.S. mall owner had $226 million in cash on its balance sheet as of June 30, along with access to other funding through the debt markets. Just this week it joined Simon Property Group and three other parties in a $243 million deal to buy assets of retailer Aeropostale out of bankruptcy.

On Layaway
Thanks in part to strong mall owners, retail REITs have outperformed other types of real estate
Source: Bloomberg
Note: Based on capitalization-weighted Bloomberg Intelligence indices of REIT valuation peers.

Yet General Growth failed to make a June payment on a $144 million loan on Lakeside Mall, a suburban Detroit mall built in 1976 and anchored by J.C. Penney, Sears, and Macy's, according to a Bloomberg analysis in June.

General Growth declined to comment on the missed payment, but the rationale probably went something like this: A troubled mall in a challenged neighborhood is no longer yielding enough money to justify the loan's price tag. In order to be able to refinance the loan on the property, General Growth would likely have to sink more money into the mall, throwing good money after bad. Instead, the mall operator can just walk away from the property, saving itself $144 million that could be better spent elsewhere and ridding its portfolio of a poorly performing mall.

General Growth is not alone. Washington Prime Group plans to hand over five of its malls to lenders as mortgages on four of the five properties come due in the next 12 months, according to a June presentation. On average, CMBS holders incur higher losses on loans from retail foreclosures than from other sectors, according to Trepp. 

Bigger Loser
CMBS holders incur higher losses on foreclosed loans of retail properties than other types of loans
Source: Trepp
Note: Data based on the average loss on foreclosed CMBS loans since 1996, by property type

There are still about 300 U.S. malls rated "A" or higher by real estate research firm Green Street Adsvisors, which grades properties by performance. Those malls are going to be just fine.

But for the more than 400 lower-performing malls -- those rated C+ or lower by Green Street -- the coming wall of debt maturity could make an already big problem even worse.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net
Rani Molla in New York at rmolla2@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net