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CRE debt keeps on giving. Retail CMBS have been a bloodbath for years. Thankfully, banks largely not on the hook.

By Wolf Richter for WOLF STREET.

“You can’t lose money in real estate” is funny in face of the mega-losses generated by commercial real estate (CRE), both debt and equity. Thankfully, so far, it’s mostly investors and not banks that have been getting mauled.

So here is this: Back in 2012, when three 10-year interest-only mortgages backed by the 1.3-million-sf super-regional Crossgates Mall in Albany, NY, were sold to investors, the collateral was valued at $470 million. This was a lot of value, as per this appraisal, and so the investors felt good about lending the mall owner, an LLC owned by Pyramid Management Group, $244 million against this property.

In 2020, when the mall was re-appraised, the value was lowered to $281 million, still above the three loans totaling $244 million.

In 2022, the 10-year mortgages matured, and Pyramid Management worked out a one-year extension until May 2023.

In May 2023, as the extension expired, Pyramid Management failed to refinance the mortgages and defaulted on the mortgages and failed to repay them. The lenders – the CMBS holders via the special servicer, can now foreclose on the property to take possession of the collateral.

But they didn’t do that. In June, the special servicer put the loans up for auction to sell them to the highest bidder and let someone else take possession of the mall.

Today, Trepp, which tracks and analyzes CMBS, reported in a note that the loans have now been sold for $173.9 million. After liquidation expenses of $29.6 million, net proceeds were $144 million, on collateral that had been appraised at $470 million when the loans were securitized.

So we note with raised eyebrows:

  • The net proceeds ($144 million) were 69% less than the property’s appraised value ($470 million) that was used in 2012 to sell the loans.
  • For the CMBS holders, the net proceeds of $144 million amount to a loss of $100 million, on $244 million in loans that they felt very good about in 2012, for a loss ratio of 41%.
  • If the buyer takes possession of the collateral, Pyramid Management will lose whatever money it put into it over the years.

The buyer of the defaulted loans effectively owns the collateral for $173.9 million. Whatever the ultimate fate of this mall is, the buyer will have a much lower cost base in it.

Retail CMBS delinquency rates.

The delinquency rate of retail properties has been horrendous ever since the Financial Crisis which was followed by the Brick-and-Mortal Retail Meltdown when brick-and-mortar retail got crushed by ecommerce one parcel at a time.

In July, the delinquency rate of mortgages on retail properties that have been securitized rose to 6.9%. The dropping delinquency rate between 2017 and 2020 wasn’t because the delinquencies were cured, but because they were “resolved” in some way, such as a foreclosure sale, or a loan sale.

The loans backed by Crossgates Mall that have now sold will “resolve” the delinquency and will pull those loans out of the delinquency rate:

A brief history of the bloodbath.

An endless number of regional and national department store chains and other retail chains, from Sears Holdings and Toys ‘R’ Us on down to Radio Shack and Bed, Bath & Beyond, filed for bankruptcy and most of them were liquidated and vanished. All regional department store chains have vanished. There are just a few national chains left, including Nordstrom, Kohl’s, and Macy’s, and they have all closed hundreds of stores over the years and continue to close stores.  J.C. Penney was bought out of bankruptcy by mega-landlords Simon Property Group [SPG] and Brookfield, because they didn’t want shuttered anchor stores to doom their malls.

Zombie malls dot the landscape around the US. Collateral values of the surviving and still functional shopping malls – as we saw with Crossgates Mall – have plunged.

The biggest landlords, such as Simon Property Group and Brookfield, have walked away from numerous malls, letting their lenders – mostly CMBS holders – take the losses. For example, Simon Property Group walked away from the 1-million-sf Independence Center in a suburb of Kansas City, Missouri in 2019, which generated what was then the largest loss ever by a retail CMBS loan; it walked away from 1.2-million-sf Town Center at Cobb in Georgia in early 2021 and the 1.1-million-sf Montgomery Mall in North Wales, Pennsylvania in mid-2021, etc. Add to them Pyramid Management Group, which is effectively walking away from Crossgates Mall.

Westfield, which is owned by the European mall REIT Unibail-Rodamco-Westfield, announced in February 2021, that it would dump all its 27 Westfield malls in the US. The first two malls it walked away from were in Tampa Bay, Florida, letting the CMBS holders take the losses. It then sold and walked from other malls in the US. In June 2023, Westfield and co-owner Brookfield walked away from the Westfield’s mall in San Francisco, also letting CMBS holders take the losses.

Three publicly traded US mall REITs have filed for bankruptcy since November 2020: the SPG’s spinoff, Washington Prime Group, CBL & Associates Properties, and Pennsylvania Real Estate Investment Trust.

This bloodbath is a result of ecommerce which began to suck the lifeblood out of mall retailers, one parcel at a time, since the late 1990s. Americans have changed how they buy this stuff. It’s a structural change, and it won’t revert to where it was in 2002 at the peak of malls.

Since 2010, ecommerce sales have exploded by a factor of 7, from $40 billion a quarter to $278 billion in Q2:

Even as department store sales have collapsed, from $58 billion in Q4 2000 to $33 billion in Q2 2023:

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