“Anticipating Death Spirals”: Here’s Why Shopping Malls Are In Worse Shape Than You Think

Monday, January 8, 2018
By Paul Martin

by Tyler Durden
ZeroHedge.com
Mon, 01/08/2018

For the past several months, we’ve written frequently about the epic collapse of the centerpiece of the 1980’s retail model: the shopping mall. With the growth of online sales finally starting to take a toll on brick-and-mortar retailers, shopping malls have faced a tidal wave of store closures and have been forced to backfill empty square footage with everything from libraries to doctors offices (see: America’s Desperate Mall Owners Turn To Grocers, Doctors & High Schools To Fill Empty Space).

Alas, a new report from property-research firm Green Street Advisors, which analyzed 950 mall locations over 2017, 230 of which were collateralized within commercial mortgage-backed securities (CMBS) loans, the financial troubles for American mall owners might be even worse than feared due to organic tenant losses from lease expirations.

First, just to put the mall economic model into perspective, Green Street points out that while massive department store closures tend to dominate headlines, they represent a very small portion of mall income. The real financial losses for mall owners come via the ancillary traffic impact on national and regional tenants which pay of the majority of mall lease income.

Facing widespread department store closure announcements over the last year and a dark prognosis from most industry experts, mall landlords have been doing their best to redevelop vacant boxes and prepare for a future with fewer anchor tenants. Although department store struggles have dominated headlines, they provide only a small portion of a mall’s net operating income (NOI) because many anchor tenants own their stores or pay little-to-no rent.

In-line tenants therefore have an outsized impact on mall NOI, and their performance offers a preferred indicator of mall health. With shorter lease terms and a higher rent burden, many tenants are making decisions in real time within each mall. The best in-line tenants to track are the ~300 national tenants who have at least 50 mall locations nationwide and are constantly judging the performance and cost of occupying space within any given mall.

“While the department stores take up a lot of space, they don’t generate much revenue for the mall owner,” Sullivan said. “The mall owner makes most of its money from the in-line tenants.”

The Rest…HERE

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