News

Landmark Links June 1st – Survival of the Fittest

One Big Thing

Its no secret that mall landlords find themselves in a very difficult position that has only been (greatly) accelerated by the pandemic.  The lack of cash flow from tenants who are increasingly finding themselves in distress gets most of the attention but their are two other factors at play that are hurting even relatively healthy malls.  From JSTOR Daily (emphasis added):

There are two areas of stress for malls’ balance sheets. One is the cash flow coming from retail tenants—or lack thereof. The second is the ability of the mall operator to put money back into the mall; many tenants are in multiple malls, and they won’t necessarily stick with a landlord that doesn’t invest in the mall. Another area of concern is the recent glut of interest-only loans across the entire commercial real estate sector. It’s a problem for regional mall loans, but also for all commercial real estate deals of recent vintages. Banhazl said Moody’s data shows that interest-only loans have a higher chance of default, especially at maturity.

When the economic pie is growing, store counts are as well as retailers expand into more locations to capture a greater amount of revenue.  However, when things turn, it becomes a zero sum game for the best tenants and they will circle the wagons around stores in the best malls, cutting the rest free when practical.

The interest only issue isn’t really a problem until collateral starts to flat line in value or deteriorate – which mall retail clearly has.  Amortization provides somewhat of a cushion since loan balances decrease over time.  However, in a low yield environment borrowers are far more likely to favor interest only loans to increase cash flow.  This is in no way unique to malls but it is where the downside of that decision will be felt the most because its where the distress is.

What I’m Reading

Bag Holders: Expensive co-working office spaces filled with perks have become ghost towns and now someone needs to foot the bill.  See Also: In a post COVID world, office landlords may become wiling to offer short-term, flexible leases without a co-working middleman.

Under the Guillotine: A wave of insolvencies have led to the fastest pace of large companies filing for  bankruptcy since 2009.

On Edge: Eviction moratoriums are starting to burn off but the economy is not yet reopened, leaving potentially millions of tenants and landlords in limbo.

Wacky Data: US consumer spending plunged in April by the most on record, yet incomes posted a record 10.5% increase due to federal payments under the CARES Act.  See Also: We are most likely in the honeymoon phase of economic reopening. 

Chart of the Day

Inventories are growing.  The US inventory to sales ratio hit a record high.

Source: The Daily Shot

WTF

Respect the Hustle: A paralyzed deaf-mute teenager attempted to rob a jewelry store in Brazil while holding a fake gun with his feet.  While I in no way condone robbery, I must begrudgingly admit this is sort of impressive.

The End is Near: A gang of monkeys in India attacked a laboratory assistant and escaped with a batch of coronavirus blood test samples.  It’s been nice knowing you guys.

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