Wall Street is beginning to look to malls for the next big short

Wall Street speculators are zeroing in on the next U.S. credit crisis: the mall.

It’s no secret many mall complexes have been struggling for years as Americans do more of their shopping online. Now they’re catching the eye of hedge-fund types who think some may soon buckle under their debts, much as many homeowners did nearly a decade ago.

Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping centre operators. With bad news piling up for anchor chains such as Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities (CMBS) are growing.

In recent weeks, firms such as Alder Hill Management — an outfit started by protégés of hedge-fund billionaire David Tepper — have ramped up wagers against the bonds, which have held up far better than the shares of beaten-down retailers. By one measure, short positions on two of the riskiest slices of CMBS surged to $5.3 billion last month — a 50-percent jump from a year ago.

Nobody is suggesting there’s a bubble brewing in retail-backed mortgages that is anywhere as big as subprime home loans, or that the scope of the potential fallout is comparable. The bearish bets are just a tiny fraction of the $365-billion CMBS market and there’s no guarantee the positions, which can be costly to maintain, will pay off any time soon.

Many malls may continue to limp along, earning just enough from tenants to pay their loans.