Mall values plunge 60% after reappraisals triggered by debt
U.S. mall values plunged an average 60 percent after appraisals in 2020, a sign of more pain to come for retail properties even as the economy emerges from pandemic-enforced lockdowns.
About $4 billion in value was erased from 118 retail-anchored properties with commercial mortgage-backed securities debt after reappraisals triggered by payment delinquencies, defaults or foreclosures, according to data compiled by Bloomberg.
Those new valuations may underestimate losses when the properties come up for sale because so much retail real estate is in distress. And few buyers are willing to take risks on aging shopping centers as e-commerce continues to grab market share.
“It’s an eye-popping decline,” Gwen Roush, an analyst with DBRS Morningstar rating service who tracks commercial real estate, said in an interview. “When we’re forecasting a loss on these malls, we’re even further haircutting that value.”
The biggest owners, such as Simon Property Group, Brookfield Asset Management and Starwood Capital Group, have started to triage properties, walking away from money-losers while reinvesting in viable locations.
Hard-hit centers were already decimated by department store bankruptcies and high vacancy rates, before COVID-19 accelerated Americans’ taste for online shopping. Vaccines and herd immunity are unlikely to lure visitors back to deserted gallerias perfumed with Cinnabon.
Only about half of the 1,100 U.S. indoor malls have a good chance of survival, according to Floris van Dijkum, a real estate analyst with Compass Point Research & Trading. The strong will get stronger while the weakest face abandonment, he said.
“There’s a huge bifurcation between good and bad quality,” van Dijkum said. “By value, 80 percent is in the top 300 malls.”
Simon, the country’s largest mall owner, is working with loan managers to restructure debt on underperforming centers or hand back the keys.
“Hope to make deals in some,” CEO David Simon said on the company’s latest earnings call. “If not, then they will no longer be part of our portfolio and we wish that new owner the best of luck.”
Outside Atlanta, Simon’s Town Center at Cobb, once appraised at $322 million, received no bids at a courthouse foreclosure auction in February, according to a news report. The company’s Montgomery Mall, near Philadelphia, was appraised at $61 million last year, a 69 percent drop from its 2014 value.
For the few malls that sold, prices were down just 1.8 percent in January from a year earlier, data from Real Capital Analytics shows. That’s because most of what traded was high-quality, according to Jim Costello, senior vice president at the research firm.
Some mall sellers are waiting for the economy to recover before unloading properties, hoping for higher prices.
Unibail-Rodamco-Westfield, owner of 37 U.S. shopping centers, said in its fourth-quarter earnings statement that it’s looking to 2022 to “significantly reduce our financial exposure to the U.S. when the investment market reopens.”
For many lower-end centers, the value is the land minus the cost of demolition, according to Costello.
“The orange tile and brown carpeting is just going to be torn down and plowed under and eventually trade at a price someone can build something else there,” he said.
Several mall operators have sought to escape their debt burdens while vacancies rise and tenants withhold rents. Washington Prime Group skipped a February interest payment and hired restructuring advisers. Pennsylvania Real Estate Investment Trust and CBL & Associates Properties filed for bankruptcy last year.
Debt management on about 17 percent of retail properties with CMBS loans has been transferred to workout specialists because of delinquencies or other issues, second only to hospitality properties, with 24.5 percent in special servicing, data from Trepp shows.
Throughout the debate over stimulus, one question has produced repeated deadlock in Washington: Should the states get no-strings federal aid?
Republicans have mostly said no, casting it as a bailout for spendthrift blue states. Democrats have argued the opposite, saying that states face dire fiscal consequences without aid, and included $350 billion in relief for state and local governments in President Joe Biden’s $1.9 trillion federal stimulus bill, which narrowly passed the House this past weekend. It faces a much tougher fight in the Senate.
As it turns out, new data shows that a year after the pandemic wrought economic devastation around the country, forcing states to revise their revenue forecasts and prepare for the worst, for many the worst didn’t come. One big reason: $600-a-week federal supplements that allowed people to keep spending — and states to keep collecting sales tax revenue — even when they were jobless, along with the usual state unemployment benefits.
By some measures, the states ended up collecting nearly as much revenue in 2020 as they did in 2019. A J.P. Morgan survey called 2020 “virtually flat” with 2019, based on the 47 states that report their tax revenues every month, or all except Alaska, Oregon and Wyoming.
A researcher at the UrbanBrookings Tax Policy Center, a nonpartisan think tank, found that total state revenues from April through December were down just 1.8 percent from the same period in 2019. Moody’s Analytics used a different method and found that 31 states now had enough cash to fully absorb the economic stress of the pandemic recession on their own.
“You can see it’s just a completely different story this time,” said Louise Sheiner, a Brookings Institution economist whose research showed that overall, the states struggled far less during the pandemic than in previous recessions.
New Jersey, for instance, managed to avoid financial calamity despite a dire forecast when the pandemic started, because of better-than-expected tax revenue from retail sales and high earners, who lost fewer jobs and reaped the benefits of a bullish stock market. However, it still had to borrow $4 billion in emergency relief.
The findings are being cited by Republican lawmakers. In a Feb. 2 blog post, the House minority leader, Kevin McCarthy, R-Calif., said the J.P. Morgan report was evidence that the states were doing just fine. He called on Democrats not to insist on “blue-state slush funds that are not needed.”
At the same time, Democrats have said states need relief even if their revenues are resilient, because their costs will spiral as schools reopen and vaccination programs roll out.
Down and up
States need revenue to function. For day-to-day operations, they raise money by collecting different kinds of taxes: sales taxes, income taxes, property taxes, and taxes on singular transactions like energy production or gasoline sales. (For public works, they issue bonds.)
Most state tax collections plunged last spring when shutdown orders started and millions were thrown out of work as businesses closed. That prompted many states to issue doomsday forecasts, lay off workers and turn to Washington for billions of dollars in aid to replace revenue they were expecting to lose. Many feared a replay of the Great Recession, when state revenues fell 8 percent and took more than five years to recover, exacerbating the overall downturn.
But this time, after falling 4 percent overall, Sheiner said, tax collections turned back up again, all in the span of a few months. She and other public finance experts cautioned that the numbers didn’t tell the full story. With new variants of the virus emerging, the pandemic isn’t over yet, and revenues could slip again — just as states increase spending amid signs of an economic rebound.
The stimulus bump
No matter how they measured the states’ rebound, the analysts said the federal stimulus money that began to flow to consumers and small businesses late in March 2020 — especially the extraordinary support for the jobless through the end of July — had helped greatly. Those programs allowed consumer spending to continue, even as unemployment surged to levels not seen since the 1930s.
During the Great Recession, Congress sent supplements of just $25 a week. This time, Washington sent supplements of $600 a week. Since the pandemic ravaged low-wage sectors like retail sales and restaurants, adding $600 a week to the lowest unemployment benefits pushed many recipients’ purchasing power above what they had while working.
Many states also benefited from tax-law changes enacted before the pandemic, after a 2018 Supreme Court decision that let them compel out-of-state retailers to collect sales taxes on online purchases. The new laws ended years of legal wrangling over how to tax such sales, just in time to help the states weather the pandemic-induced shift to online shopping.
“If the COVID-19 pandemic had occurred even five years earlier than it did, the impacts to state and local sales taxes would have been truly devastating,” Dan White, director of government consulting and public finance research at Moody’s, said.
Windfalls for some
In his survey, Peter DeGroot, head of municipal research and strategy at J.P. Morgan, found a handful of states, including Idaho, South Dakota and New Mexico, that managed to take in more money last year than in 2019. The survey also identified several states where tax revenues have not yet bounced back because they depend heavily on tourism, oil and gas, or coal extraction — among them Hawaii, Nevada, Florida, Texas and West Virginia.
Sheiner’s analysis showed that Idaho had the biggest revenue recovery of any state. She conducted her research with Byron Lutz, an economist with the Federal Reserve.
With some states now “enjoying windfalls” and others still struggling, White said a smaller amount of money, more carefully targeted to the states that needed it most, would be the most efficient approach for Congress. But getting assistance to those governments that truly need it, without sending unnecessary aid to those that do not, will require some “exceptional creativity,” he said.