Is Retail Commercial Real Estate The Next Financial Implosion?

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by Gordon T Long

There is much more happening in the rapidly rupturing  retailing industry than a shift to online buying, a collapse in US shopping mall traffic and the decline of the “Department Store” model. Over two years ago Charles Hugh Smith and I produced a number of research videos ( 02 03 14 – THE RETAIL CRE DOMINO, 11 30 13 – LOOMING US RETAIL IMPLOSION: An Urgent Re-Think Required! ) outlining the alarming changes in US retailing. We revisited the current status of that work to find the rate of decline now even faster and accelerating.
The US as a 70% consumption based economy has supported the US having 10-20 times the retail floor space of other developed economies. Major fissures however are shattering this once stable, high yield commercial real estate ‘financial mecca’ that Insurance companies, Pensions, Trusts, REITS, Small Banks and Credit Unions have traditionally feasted on. Those days may be quickly coming to an end as smart investors are aggressively  trying to reposition their portfolios first within this relatively illiquid market. What they see is:

  • Looming higher refinancing rates and terms for rollover refinancing,
  • Retail floor space pricing relentlessly  under pressure from online shopping,
  • Strong signs of CMBS underwriting deteriorating,
  • Leveraged Loans and Collateralized Loan Obligations (CLOs) under pressure
  • Expiration of the Terrorism Risk Insurance Act (TRIA) set to expire,
  • Property Tax pressures from City and Local governments under mounting financial budget pressures,
  • A potential US Recession  since the business & credit cycles are “long in the tooth” for this expansion,
  • A shift in demographics of the working age population and reducing buying patterns of a retiring baby boom generation,
  • Real Estate Asset Prices that have likely peaked for this cycle,
  • A major shift in buying preferences of the Millennial generation as they increasingly dominate retail purchases,
  • A collapse of shopping mall traffic as a source of retail volume,
  • A decline of the Department Store Model.
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Possibly even a bigger concern of investors is what they witnessed during the 2008 housing crisis regarding financing. They see the risk exposures as potentially immense due to the securitization complexity of an industry financed through MBSs, Leveraged Loans, Collateralized Loan Obligations, Synthetic CLOs etc.,. The US housing industry imploded via comparably simple securitization product structures such as CDS’s, CDO and ABSs. Few institutional professionals would claim they have a full grasp or understanding of all the creative and secretive means used to finance these modern multi-billion dollar commercial real estate projects. These projects are based on underlying assumptions of growth, rates, prices, sustained trends etc. which are now all under pressure.
This is a lot of empty commercial real estate space which needs tenants – and it doesn’t include the 100’s of store closing announced at Macy’s, JC Penney, K-Mart, Radio Shack, Circuit City, Borders, Sports Authority ….

The wave builds daily!
A 35 minute video with over 30 supporting slides.

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2 thoughts on “Is Retail Commercial Real Estate The Next Financial Implosion?

  1. from what I’ve read this last month, the malls are next. they are loosing their big ‘corner stones’, so to speak. sears, penneys, macys, kohls, the list goes on.

  2. One factor no one is talking about or doing any actual research on to quantify is growing resistance to Chinese goods. Americans are so sick of everything on the shelf being from China that it’s one more reason to say “no thanks” to consumerism. No price is low enough when you know it’s junk that will be in your trash in no time.
    I can remember the change in perception as Americans stopped using “made in Japan” as an epithet as quality from that country rapidly improved. I can remember when Triumph motorcycles bought an early Honda to take it apart and see what their competition was doing and were dismayed that (and I can still remember this word for word) “It was built like a Swiss watch and wasn’t a copy of anything.” We are seeing none of this improvement in Chinese goods because they don’t give a shit about building their reputation the way Japan did. When the name of your country means “Central Nation” and is thousands of years old, I guess you don’t have to worry about exporting quality.

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