Last week we ran a report on how the rise of online shopping is massively changing the retail property industry in the UK. Well, it is no secret the US retail industry is also changing as more of us do more of our shopping online and high street sales continue to suffer.
Everything is bigger in America, and the so-called mega-malls are no exception. But they are an exception to the wider rule, as we have seen in previous downturns people spend more on entertainment, arguably to cheer themselves up from all the economic woes, and so the mega-malls, which woo consumers with cinema's and bowling alleys are proving to be safe from the current retail slide.
It is the mainstream shopping malls that are in trouble, with forecasts that up to 15% of some 1300 suburban shopping malls in the US could close over the next 5 years due to competition from online retail.
"I think 200 are going out of business," said Gerry Mason, executive managing director at property group Savills. "We’re 15-20 per cent overbuilt. There are just too many stores."
The effect on the retail property business can clearly be seen in the falling number of retail properties being packaged as part of Commercial Mortgage-Backed Securities deals.
CMBS are bonds backed by a pool of mortgages on commercial property, ranging from office towers to apartment blocks. In 2010 retail property accounted for 56 per cent of CMBS pools coming to market according to RBS. By the second half of 2011 this had fallen to 42% and again to 36% last year. So far this year the average is just 30%.
Traders are watching as sales continue to fall at retailers such as Sears and JC Penney and last week's announcement from leading bookseller Barnes and Noble that it would shut a third of its stored over the coming decade.
"Investors expressed concern about retail exposure in the long term," said Richard Hill, CMBS strategist at RBS. Analysts say the market appears to be dividing between mega and second-tier malls, with mortgages on mega-malls increasingly being securitised separately in single-property CMBS.
Away from the doom and gloom Simon Property Group reported strong earnings this week as higher rents at its high-end malls boosted performance. However, investors have good reason to be cautious about retail property as a component of CMBS, because it only takes for one important tenant to close a store and the entire mall suffers. All tenants in a mall will often be given the chance to renegotiate their leases when a traffic-driving anchor tenant closes its store. This obviously impacts on the returns from CMBS held against mortgages on the property.
At present e-commerce is responsible for just $1 of every $10 spent by US consumers, but this share continues to rise. In end-of-year shopping last year retail sales increased by 14% while overall sales increased by just 3% according to ComScore and the National Retail Federation. The internet shopping boom is thought to have been partially responsible for the demise of Circuit City, an electronics chain, and Borders, a book store. Sears and JC Penney, who often serve as mall anchor tenants have announced store closures in the past 18 months, as have Gap, the fashion chain, and Best Buy, another electronics chain.
- Wednesday 13 February 2013