The Hidden Risks at Shopping Malls

SMITH BRAIN TRUST – The latest potential threat to real estate in America may be found at the local shopping center, as mall landlords grapple with a crush of vacancies and, faced with the prospect of restructuring their debt, decide to walk away instead. The moves, a worrying echo of the 2008 housing crisis, have left lenders saddled with failing shopping centers and looking to dump them at discount prices. And that threatens to erode nearby home prices.

Mall owners are facing “a confluence of headwinds,” says Clifford Rossi, executive-in-residence and professor of the practice at the University of Maryland’s Robert H. Smith School of Business. 

First, there’s the fact that there are “too many malls in America,” Rossi says, and too many of them are outside major metropolitan areas, where they could draw ample foot traffic and sustain a heavy roster of stores. 

Second, there’s dwindling mall traffic as more and more people shop online. Citing increased competition from e-commerce, Macy’s department store recently detailed its plans to close 100 brick-and-mortar stores; Sears will shutter 150 Sears and Kmart locations; and The Limited will close all 250 of its shops. 

And third, there’s a glut of commercial real-estate loans on malls that are coming due for restructuring, Rossi says. 

There is an estimated $50 billion in U.S. shopping mall properties that are held in commercial-backed mortgage securities, Rossi says, much of it on 10-year loans that are due for refinancing this year. The loans originated during a boom of shopping mall commercial investment in 2006-2007, cousin to a boom in residential real-estate. 

Many of the malls, and there are hundreds of them, were in regions anticipating growth that never materialized. They struggled through the financial crisis, then found their footing for a few years, only to begin struggling again as online retail encroached, dragging down sales at malls that weren’t strategically located in metropolitan areas.

Between January and November of last year, 314 loans on retail property were liquidated, or 11 percent more than the year-earlier period, according to The Wall Street Journal. There could be more this year, Rossi says.

Owners of struggling malls, the ones that have lost their anchor tenants and other key storefronts, will be less likely to refinance. Fewer tenants means less money coming in. For those owners, walking away becomes a more attractive option. 

“This is not unlike what we saw with some borrowers during the housing crisis,” says Rossi, recalling when homeowners across the country, in debt for more than their homes were worth and unable to make mortgage payments, walked away from their properties, leaving the banks to foreclose and to sell off homes on the cheap. 

The vast majority of those homes eventually saw their property values return. But that may not be the case for the malls that dot America’s distant suburban landscape. Their demise, Rossi says, appears inevitable, and final.

“The structural change that is going on in this country right now in respect to online everything – banking and shopping and everything that goes along with that – is really having a big impact on the brick-and-mortar lenders and the brick-and-mortar retailers that are out there.”