Sears Bankruptcy Likely to Inflict Pain on Mall Owners for Years

(Bloomberg)—As Sears Holdings Corp. goes through bankruptcy, retail landlords wondering how they could be impacted might want to look at a 2015 deal.

Mall owner Macerich Co. struck a agreement that year with the struggling department-store operator to redevelop a 300,000 square-foot store at Kings Plaza Shopping Center, a high-traffic mall in Brooklyn, New York. Three years and $100 million later, Macerich finished work on the space, which has been subdivided and leased to Burlington, J.C. Penney, Primark and Zara.

After Sears filed for Chapter 11 protection early Monday, Macerich’s lengthy — and expensive — process is worth keeping in mind. Other mall owners, who have been grappling with the retailer’s store closings and diminished ability to attract shoppers for years, must now contend with the possibility of a full liquidation, which would mean a glut of retail real estate in an already oversupplied market. For now, a majority of stores will continue to operate.

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Wall Street Investors Increase “Big Short” Bets on CMBS Retail Loans

In 2015, “The Big Short” movie based on the Michael Lewis book chronicled a handful of investors who struck it rich by betting on the failure of subprime residential mortgages. Some investors are making a gamble that retail-backed CMBS loans could be the next “big short.”

Hedge fund company Alder Hill Management is one high-profile player shorting CMBS with high concentrations of retail loans. The Wall Street Journal first reported on the hedge fund’s short 18 months ago, followed by a more recent story in early August that said the hedge fund made an additional short investment on 2012 and 2013 era loans. Earlier this spring, Bloomberg also reported that Deutsche Bank and Morgan Stanley had both recommended buying credit protection against, or shorting, segments of CMBS with heavy concentrations of retail loans.

Some people are looking at retail loans as the next “big short”, says Manus Clancy, senior managing director and the leader of applied data, research, and pricing departments at Trepp. “There are some similarities, but there are a lot of differences,” he notes. One difference from the subprime short is that there were very few investors taking those short positions. “In this case, you have a pretty good amount of people on either side, meaning longs and shorts,” says Clancy. In addition to Alder Hill there are about two dozen investors that have either already taken a short position or are looking at the opportunity, he adds.

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What Retail Apocalypse? Ask Some Department Stores, But Not All

(Bloomberg)—Adapt or die isn’t just a tenet of evolution: It’s also the reality faced by the U.S. department-store industry. And some are doing it far better than their rivals.

Although the chains are often lumped together with other mall mainstays when lamenting the “retail apocalypse,’’ this past week’s earnings reports underscore just how different department stores’ strategies are amid a wider brick-and-mortar slowdown.

Nordstrom Inc., for instance, posted same-store sales that were almost four times higher than expected after drawing in buyers for both its full-priced and discounted merchandise, powered by a massive anniversary sale. At the other end of the spectrum, CEO-less J.C. Penney Co. saw its stock plunge to historic lows as it put more items on clearance to get rid of excess inventory. And for Macy’s Inc., which beat virtually every estimate set by the market but still disappointed investors, it seems the jury’s still out.

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The Mall is Dead. Long Live Bricks-and-Mortar?

Recently, GGP shareholders approved the Brookfield Property merger deal by a wide margin. Sure they did. The value was reported to be in the range of a 6 percent cap rate, a number that any self-respecting, not fee-driven real estate owner would consider aggressive.

Yes, I have heard the commentary. The cap rate was on the low side because the properties are Class-a, located in great locations and therefore protected from the “retail apocalypse” (if that’s still a thing). Also, GGP has begun to convert many of these malls into more experiential facilities, which serves as proof positive that they will overperform in the new age of retail. Now that I mention it, what in fact is the new age of retail? Have retail tenants even settled on a proven new-age prototype around which we can build new-age properties?

For the record, brick-and-mortar retail will long outlast Amazon’s break-even flirtation with retail. That doesn’t change the fact that GGP’s portfolio does not represent the stable investment touted by the various commentators. I think the only question that remains is whether it is a redevelopment or a covered land play.

Something everybody in retail seemingly agrees on is that the department store is a new subset of endangered species. When Sears finally brings its going out of business sale to an end, all its stores will close—including the “class-A” locations. In 2009, the Wall Street Journal published an article titled Empty Mall Stores Trigger Rent Cuts, highlighting the effect of co-tenancy clauses on retail properties. This property-killing clause can be found in almost every retail lease, entitling tenants to rent reductions and even terminations if occupancy (including unowned portions) drops below a predetermined threshold. To quote the article, “The result is a ripple effect, as failures trigger co-tenancy violations, which in turn lead to canceled leases, more vacancies and more violations” and ultimately the demise of an otherwise healthy property.

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Shopping struggles: These 11 retailers may not survive 2018

The retail apocalypse is entering its ninth year.

Many North American retailers were wiped out in the “retail apocalypse” which started in 2010. Amazon (NASDAQ:AMZN) and Walmart’s (NYSE:WMT) growth, the rise of fast fashion retailers, reserved spending habits after the Great Recession, and dying malls crushed countless retailers.

Some retailers survived the downturn by closing stores and expanding their e-commerce presence, but others weren’t as lucky. Let’s examine eleven retailers which could struggle to remain relevant this year.

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Lord & Taylor’s Fifth Avenue Store to Close After 104 Years

(Bloomberg)—Hudson’s Bay Co., the owner of Saks Fifth Avenue, said it will close as many as 10 Lord & Taylor stores — including the flagship Manhattan location — in an attempt to revive its struggling units.

The closures will occur through 2019, the company said Tuesday. Hudson’s Bay had originally planned to keep a Lord & Taylor presence in the Italian Renaissance building on Fifth Avenue, which it agreed to sell for $850 million in October. The store opened there in 1914.

“An increased focus on driving Lord & Taylor’s digital business, combined with new leadership and an optimized store footprint, is expected to reduce costs and improve the overall performance of this business,” Hudson’s Bay said in a statement Tuesday.

The Canadian department-store company, which agreed to sell flash-sale website Gilt on Monday, reported a normalized loss of C$1.22 a share that was wider than analysts’ estimates of 76 cents. Comparable store sales fell 0.7 percent in the quarter ended May 5. The results sent the shares plunging as much as 13 percent in Toronto, the most since December. The stock was down 3.6 percent to C$10.24 at 10:58 a.m.

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Retail’s Ruinous Run

Retail real estate’s troubles in recent years have been well-documented. Online sales continue to eat away at brick-and-mortar activity. Many chains are struggling, forced to scale back on stores or go out of business entirely.

The results from NREI’s fourth retail real estate survey reveal that the outlook from retail operators, investors and developers continues to be bleak. Sentiments on cap rates, occupancies and retail rents all declined from past years. And respondents see retail as having the dimmest outlook of any of the major property sectors.

On a scale of one to 10, with 10 being the most attractive, retail scored 5.5 in this year’s survey. The number has dropped for three consecutive years and leaves retail at the bottom of the list compared to office, industrial, multifamily and hotels. And whereas in past years the spread between the top and bottom property types was not that great, retail’s score in this year’s survey is well below the highest-scoring sector (industrial), which rose to 7.6.

In fact, the scores for those sectors are two sides of the same coin, with industrial’s prospects rising directly in concert with retail’s struggles as the ever-growing volume of online sales fuels the lackluster results at many brick-and-mortar outlets.

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