U.S. Retail Closures May Hurt Tertiary Malls

A new report by Fitch Ratings reveals that a flurry of in-line tenant store closures could further weaken some already underperforming malls, especially those in tertiary locations.

mary MacneillA new report by Fitch Ratings reveals that a flurry of in-line tenant store closures could further weaken some already underperforming malls, especially those in tertiary locations.

“Malls in tertiary locations are struggling because they are usually the only mall in town and often have lower sales than primary and secondary locations,” Mary MacNeill, managing director in Fitch’s U.S. CMBS group, told Commercial Property Executive. “What may be troubling is if retailers decide to close tertiary locations with weaker sales, these malls would suffer higher vacancy rates while trying to find a new tenant. Most retailers would rather be in more primary locations with more foot traffic.”

So far in 2014, the majority of the store-closing announcements are associated with smaller sized tenants, with the exception of Macy’s and JC Penney. Other recent retail store announcements have been made by Sears, Walgreens, Radio Shack, Children’s Place, Abercrombie & Fitch, Aeropostale, Cold Water Creek, Office Depot and Staples.

Mall operators in tertiary locations (those not in major or secondary markets) will have the hardest time re-tenanting space, according to the report. Fitch already assumes higher loan loss severities in the analysis of these malls.

“In-line tenant store closures have less of an effect on primary locations with strong operators because they are always looking to reposition their tenants within malls and get newer concept tenants,” MacNeill said. “Conversely, in-line tenant store closures will certainly continue to hurt the second- or third-strongest mall in a market.”

The Fitch report also shows that store closures are unlikely to have a significant impact on the performance of Fitch-rated CMBS transactions.

Retail CMBS delinquencies have been declining along with the overall CMBS delinquencies. According to MacNeill, retail delinquencies have been declining gradually over the past year along with overall CMBS delinquencies due to market stabilization, healthy new issuance levels and special servicers having more success in resolving non-performing loans. The retail rate declined by four basis points in April to 5.1 percent, while the overall rate moved three basis points to 5.1 percent.

“Malls within strong markets should continue to perform well,” she said. “Secondary or weaker locations are likely to struggle if there are several locations in the market in question.”

Looking ahead, the trends don’t seem to be shifting anytime soon.

“Fitch is still cautious on retail CMBS, particularly with regard to malls because these are generally 10-year loans and market demographics can change quickly,” MacNeill concluded. “Macroeconomic conditions are correlated to retail performance including employment and consumer spending trends.”