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After years of brick and mortar collapse, the pandemic. Desperate measures are now needed.
By Wolf Richter for WOLF STREET.
Simon Property Group and Brookfield Property Partners this week secured bankruptcy court approval to purchase the retail and operating assets of JC Penney, which filed for bankruptcy in May. Simon is the biggest mall REIT [SPG] in the USA. Brookfield Property Partners is an entity of Brookfield Asset Management, a huge, complex Canadian asset management and private equity firm with many entities. Brookfield Properties has grown into a huge mall owner after acquiring the REIT GCP Mall, the second largest mall owner in the United States, in 2018. In 2010, after General Growth Properties, as it was known, filed for bankruptcy, Brookfield provided funding in exchange for an equity stake. In 2018, as GCP returned to bankruptcy, Brookfield bought the remainder of the REIT for $ 15 billion.
But buying the type of merchandise sold in malls has moved massively to online platforms, including the online platforms of mall retailers, like Macy’s, one of the top 10 sites. e-commerce business in the United States. No group has been hit harder than physical department stores, which are essential anchor points for shopping malls. It started 20 years ago when department store sales peaked. From December 2000, sales fell 45% in February 2020, after a series of department store bankruptcies that included the No.1 department store chain Sears Holding. In September 2020, sales were down 48% from this peak:
So now Simon and Brookfield, along with other mall REITs, are buying retailers out of bankruptcy court to keep stores open so they can pay rent and occupy the otherwise vacant space, creating foot traffic. and attract a few buyers for the other stores, so that they too can keep paying the rent and prevent the mall from turning into another zombie mall.
If Simon and Brookfield hadn’t intervened, JC Penney could have been wound up. This would have resulted in the loss of some 60,000 remaining jobs and the closure of about 650 remaining stores – compared to about 90,000 jobs and 800 stores before filing for bankruptcy.
Simon’s malls have about 60 of these JC Penney stores, and Brookfield also has a host of JC Penney stores in their malls. They are flagship stores. If these stores close, it will be difficult to find new tenants willing to pay what the department stores are paying. Anchor stores are the magnets that attract foot traffic.
Without flagship stores, there won’t be enough foot traffic to keep the other stores open, and one after another they will close. This has happened several times before the pandemic, and the pandemic is speeding up the process. Each of these JC Penney stores must stay open and attract shoppers to keep the mall alive.
Sparc, a joint venture between Simon and Authentic Brands – in which venture capital firm BlackRock became the largest investor last year – has already acquired other bankrupt retailers, including Brooks Brothers, Forever 21 and Lucky Brand. Authentic Brands has a portfolio of over 50 brands. In November of last year, he bought pieces from bankrupt Barneys New York.
The idea now is to bring some of these brands into certain stores, including JC Penney – and people will come, or whatever.
Simon is focused on A malls in the best locations and weathered the collapse years before the pandemic better than other mall owners. Some shopping center owners have already filed for bankruptcy, including two shopping center REITs last Sunday: CBL & Associates Properties and Pennsylvania Real Estate Investment Trust. And things get tough even for Simon.
On Vaccine Monday, SPG’s battered shares jumped 27.9%. But then Simon released quarterly results, which were approximate. Revenue had fallen 25% in the third quarter and the occupancy rate fell to 91.4% on September 30, from 94.7% a year earlier, and the lowest in many years. On Wednesday, SPG had given up nearly half of Monday’s vaccine gains.
Buying your own tenants slumped out of bankruptcy, with their entire business model under attack for two decades – even ignoring the pandemic for a while – has the aura of desperation to keep stores open that would otherwise close and empty. the shopping center. .
In a way, in the short term, that’s a good thing: keep some jobs, keep occupancy rates from skyrocketing, and keep malls from turning into zombies.
But even Simon can’t get Americans to quit e-commerce. This is a structural change in the way Americans buy. Retailers in malls are the target of what e-commerce is all about. The damage started years ago. I’ve documented the brick-and-mortar collapse at least since 2016. This structural change isn’t a new development, although mall owners have publicly pooped this phenomenon every step of the way.
Simon has already abandoned some shopping centers, including sending jingle mail to creditors. For example, Simon gave up the mortgage on a million square foot super regional mall in a Kansas City, MO suburb called the Independence Center. When the mall was sold in a foreclosure sale in April 2019, it generated a loss of $ 150 million for commercial investors in mortgage-backed securities. Trepp, who follows CMBS, called it “the biggest loss on a retail CMBS loan ever.” This was only part of the regular brick and mortar collapse and preceded the pandemic by a year. And now the process – including the jingle mail – has sped up.
At the time of the CMBS securitization a few years ago, inflated collateral values led to soothing loan-to-value ratios. Then the problem hit. Lily… Jingle Mail haunts commercial mortgage securities as property values fall below loan amounts
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