Northeast Real Estate Business

MAY 2018

Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.

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32 • May 2018 • Northeast Real Estate Business CMBS SECTOR WATCHING RETAIL CLOSURES Special servicing and delinquency continue to decline in the retail CMBS segment, but analysts are watching store closure and bankruptcy announcements closely. By Catherine Liu I nvestors closely monitoring the retail industry over the last three months digested a slew of headlines from retailers active in the grocery and women's apparel and accessories lines of business. The period between February and mid-April was particularly notable to many U.S. consumers as a number of supermarket operators, including South- eastern Grocers, Tops Markets, and SuperValu, an- nounced plans to shutter stores, restructure existing loans, or sell off some of their current assets. Other long-established bankrupt retail chains like Bon-Ton and Toys "R" Us also delivered surprising news about their decisions to commence liquidation ef- forts despite attempts to remain in operation. The upcoming wave of these brick-and-mortar store clo- sures will pose additional challenges for U.S. mall owners that are already having difficulty with filling empty storefronts. In terms of the retail segment in the CMBS market, special servicing and delinquency percentages have consistently fallen since the second half of 2017. Distress rates will continue to trend down as large, troubled retail assets behind neighborhood shop- ping centers and regional malls pay off and issuance activity gains further momentum. In the 12-month period between April 2017 and March 2018, roughly $19.4 billion in retail CMBS was paid off or liquidated, 14.18 percent of which incurred losses at resolution. Loans disposed during this period took on a combined total of nearly $1.51 billion in write-offs, generating a 12-month moving average loss severity of 54.73 percent. This resulted in a 7.76 percent loss on the total balance of all re- tail loans that paid off. In comparison, the overall CMBS loss severity for loans disposed within this timeframe clocked in at 43.83 percent. Based on un- derwritten maturity dates for loans that were sched- uled to pay off during this time period, $11.7 billion across 551 retail loans is still outstanding. The total volume of retail loans liquidated between February and March 2018 topped $1.09 billion, while average loss severity for disposed loans reached 68.23 per- cent in February and 42.85 percent in March. The $59.9 million CMBS loan against the 720,820-square-foot Chesapeake Square Mall in Vir- ginia suffered the heaviest loss out of all February and March retail payoffs. Property perfor- mance at Chesapeake had con- sistently declined as a number of major retailers such as Sears, Macy's, Aeropostale, Dillard's, Payless, and Gymboree have va- cated their space at the shopping center over the past few years, often without any replacement tenants. In February, the REO suburban mall was purchased by local developer Kotarides Hold- ings for $12.9 million at a price tag that's substantially lower than its underwritten value of $104 million in 2004. The asset comprised 48.25 percent of JPMCC 2004-LN2 at disposition and was ultimately resolved with a loss of $51.1 million. Conversely, a noteworthy retail loan that showed up in last month's remittance report that did not incur any losses at resolution is a $140 million note backed by a 1.37 million-square-foot mall in Merrillville, In- diana. The loan was securitized in LBUBS 2008-C1. In Trepp's analysis, default rates were calculated by taking the total number of retail loans that have entered default every month and dividing that by the total number of loans that were not categorized as being in default in the previous month. To us, default is defined as loans that are 60-plus days de- linquent, in foreclosure, REO, or considered to be non-performing balloons. Similarly, the percentage of loans that are newly transferred to special servic- ing is calculated by taking the total count of loans that were transferred to special servicing in the pres- ent month as a numerator, and using the total num- ber of loans that were not in special servicing in the month prior. Total loan count was used in this study rather than outstanding loan balance to give equal weight to each retail transaction, regardless of asset size. Newly Defaulted Retail Loans • Between the months of February and March, 18 loans with a combined balance of $237.8 million were newly categorized as default. The average monthly default rate for the last two months was pegged at a low of 0.14 percent. • The six-month moving average rate for newly defaulted loans, which can be used as an indicator of prevailing trends, dropped five basis points to 0.24 percent in March. The rate has consistently de- clined from a high of 0.77 percent in August. • The largest retail loans that entered default in February and March include the $55.5 million loan behind the Rosemont Commons mall in Fairlawn, Ohio (GSMS 2017-GG10), the $25.5 million note against the retail property at 8585 South Yosemite Street in Long Tree, Colorado MLCFC 2007-9), and the $24.7 million loan for Square 95 — which was formerly anchored by the Gander Mountain store — in Woodbridge, Virginia (COMM 2015-CR25). Of particular concern from the list of newly defaulted loans is the $25.5 million 8585 South Yosemite Street, which matured in January 2018. Backing the loan is a 158,145-square-foot single-tenant retail center that was 100 percent occupied by a Sears Outlet store at securitization. Sears Holdings opted not to renew its lease at the Lone Tree location that expired this past February, and the asset is currently scheduled to un- dergo a foreclosure sale in June 2018. The loan cur- rently carries an appraisal reduction amount (ARA) of $14.5 million. • The percentage of defaulted retail loans dipped to 5.96 percent in March, marking it the first time the rate has fallen below the 6-percent range in over a year. This comes in below January and February's reading of 6.33 percent and 6.20 percent, respective- ly. In comparison, the national default rate across all property types clocked in at a 22-month low of 4.39 percent for the month of March. Newly Transferred to Special Serving • Seventeen loans with an outstanding balance of $182.9 million were transferred to special servic- ing from February to March at an average monthly transfer rate of 0.13 percent. • The six-month moving average special serving transfer rate reached 0.17 percent for January, which is down 22 basis points from the same period a year ago. • The $24.6 million Square 95 note, which rep- resents 2.22 percent of COM 2015-CR25, is one of the largest loans transferred to special servicing in the past two months. Constructed in 1996, the un- derlying collateral is a 155,309-square-foot regional mall located at 14041 Worth Avenue in Woodbridge, Virginia. Gander Mountain previously occupied 51 percent of the property's net rentable area, but had stopped paying rent at the property after filing for Chapter 11 bankruptcy in March 2017. The loan is currently in payment default and was tagged with a first-time appraisal reduction amount (ARA) of $9.2 million in April. • The retail special servicing rate fell 38 basis points to 6.96 percent in March, which is a decline of 38 basis points from the rate recorded in January. Since January, approximately $82.7 million in dis- tressed retail assets were removed from the special servicing volume. February and March Retail Headlines • Aaron Brothers: Michaels Companies an- nounced that the arts and crafts retailer will be shut- Source: Trepp Monthly Retail Default Rates Catherine Liu Trepp

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