Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.
Issue link: https://texasrealestatebusiness.epubxp.com/i/817755
42 • May 2017 • Texas Real Estate Business www.REBusinessOnline.com O ver the past two years, quar- terly earnings results that fol- lowed holiday shopping sea- sons have come with a side of fresh store closures as well as new bank- ruptcy filings by major retailers. In the first few weeks of 2017 alone, long-established chains such as Ra- dioShack, JCPenney, Macy's, CVS, and Gordmans announced plans to shutter hundreds of underperforming store locations from their portfolios, putting added pressure on numerous commercial real estate landlords and mall center operators. The trend reflects the ongoing effort of retailers to reduce costs and focus on new showrooming and omnichan- nel strategies that better cater to the purchasing tendencies of today's con- sumers, a sizable portion of which includes millennials. The confluence of e-commerce, changing consumer shopping habits, and new technologi- cal enhancements has shifted the retail landscape away from traditional uses of large physical footprints and the one-dimensional approach to sales as discount, experiential, and specialty retailers continue to rise in popularity. Historical Performance The national delin- quency rate (catego- rized as 30 or more days past due, in foreclosure, REO, or non-performing bal- loons) for loans secu- ritized into private- label CMBS deals has been steadily increasing during the "wall of maturi- ties" period, as the large wave of more than $300 billion in legacy loans is- sued from 2005 to 2007 inched closer to their scheduled maturity dates. Many of these seasoned, 10-year loans that came due did not pay off or refinance in time, pushing up the CMBS delin- quency rate across all property sec- tors. Loans backed by retail properties currently possess the second-highest rate among all major property types, behind office loans. The retail delin- quency rate has been fluctuating near the 6 percent-mark since last October and clocked in at 5.92 percent for the month of February, roughly 70 basis points higher than the level from 12 months ago. From a historical perspective, how- ever, retail delinquencies recovered more quickly than other major prop- erty types after the financial crisis. Special servicers acted more swiftly to foreclose on distressed retail collateral to cut losses, in contrast to the "extend and pretend" approach more com- monly employed with other property types. While the retail delinquency rate has largely trended below the overall rate during the recovery, mounting retail defaults have caused percent- ages to climb above the national aver- age CMBS delinquency rate across all property types over the past two years. At the moment, the 20 largest CMBS loans secured by distressed retail make up about 25 percent of the total balance for all delinquent retail loans. Major loans that have fallen past maturity in the past year include several that are backed by shopping centers formerly owned by the Westfield Corporation that were later sold to other REITs: the $240 million Westfield Centro Portfo- lio, the $140 million Westfield Ches- terfield, and the $110 million Westfield Shoppingtown Independence note. Of particular concern from this list is the Westfield Centro Portfolio loan. Thus far, the loan has tacked on an appraisal reduction amount (ARA) of $166 mil- lion as well as $26 million in advanced appraisal subordination entitlement reduction (ASER) and fees. The ARA is an estimate of anticipated losses that may loom ahead based on a property's appraised value and the amount that is projected to be recoverable at liqui- dation, while ASERs are used to de- termine the payments that servicers should be advancing on a loan. This could ultimately lead to very heavy losses for the JPMCC 2006-LDP7 trans- action, a deal which also houses a number of other defaulted retail and office loans. Another Brick in the Wall of Maturities Thanks to historically low interest rates, an abundance of available capi- tal, and the large maturing volume, more than $245 billion in private-label securitized mortgages have been paid off or refinanced since the start of the "wall of maturities" in 2015. As the two most dominant property types in commercial real estate lending, re- tail liquidations amounted to over $70 billion, or approximately 29 percent of this total, while office made up an- other 31 percent. The six-month mov- RECALCULATING RETAIL CMBS Will lenders and borrowers adapt to the shifting retail landscape? By Catherine Liu, Trepp RECON | BOOTH #S236Q P LAY T O W I N Success is the product of careful planning, thoughtful team building, and making the right move at the right time. Colliers' advisors know how to set the board so that your commercial real estate strategy supports your core business goals. Colliers will help you increase your bottom line, enrich your brand, and energize your people. Make the move to Colliers and win. While most brokers show you the price of real estate, Colliers' advisors show you the value of real estate. COLLIERS.COM/ TEXAS Catherine Liu Trepp