Mallmageddon: How Far the Value of Four Live Malls, Not Zombie Malls, Collapsed this Summer

Leaving Big Holes in CMBS as mega-landlords, such as Bookfield and Westfield’s owners, walk away.

By Wolf Richter for WOLF STREET.

Here are four big malls that are open and doing business, and that have defaulted on their debts, and whose value has been slashed over the past couple of months as lenders are bracing to get stuck with the collateral, while landlords are either walking away or filed for bankruptcy.

The loss of “value” is measured from the time the mall loan was securitized into commercial mortgage-backed securities (CMBS) until the most recent haircut.

Westfield Palm Desert Mall (Palm Desert, CA): -74%.

The 1-million sq. ft. Westfield Palm Desert Mall, along with other Westfield malls, is owned by European commercial property giant Unibail-Rodamco-Westfield which, bucking under $32 billion in debt, vowed in February to get rid of all its US malls. One way of getting rid of a mall is to walk away from it and let lenders take the loss.

A 575,000-square-foot portion of the mall, not including the anchor stores, serves as collateral for a $125 million loan that was securitized in 2014 into CMBS. To sell the CMBS to investors, the portion of the mall was appraised at $212 million.

Investors felt secure by this conservative structure. What could go wrong with lending $125 million on $212 million worth of collateral?

What went wrong was the brick-and-mortar meltdown that started in 2017 and which has now turned into mallmageddon.

In November 2019, Sears announced that it would close its store at the mall. The former Sears store, which wasn’t part of the collateral, remains empty. An empty box for an anchor store is deadly for a mall. The other anchor stores at the mall, a Macy’s and a JC Penney, are also not part of the collateral. JC Penney filed for bankruptcy in 2020.

In May 2020, the Unibail-Rodamco-Westfield defaulted on the loan payment. In June 2020, the $125 million loan was transferred to special servicing for payment default.

Unibail-Rodamco-Westfield has already shed several Westfield malls by giving them back to the lenders. In November 2020, ratings agency Fitch expected that either a deed-in-lieu or a foreclosure would be the likely outcome.

Now, the lenders have taken control. Management will be “transitioned” to a third party. Lenders are trying to sell the mall, and Unibail-Rodamco-Westfield will wash its hands off another American mall. The lenders will take the losses.

But how much are the lenders expected to lose? The special servicer had the collateral portion of the mall appraised twice: In March, at $65.9 million; and in August, according to Trepp, at $55.2 million.

This cut the “value” of the collateral from the $212 million “value” with which the CMBS was sold in 2014 to $55.2 million now amounts to a haircut of 74%.

If the mall can actually be sold for $55.2 million, and before fees and other charges, lenders, having lent $125 million against $212 million in collateral, would pocket a loss of 56%.

Park Place Mall (Tucson, AZ): -72%

The 1-million sq. ft. Park Place Mall is owned by the second largest mall landlord in the US, Brookfield Properties, which has also been shedding malls in the manner that is now so popular, by handing them back to the lenders, letting them take the loss, and walking away.

A 480,000 sq. ft. portion of the mall is collateral for a $164.3 million loan. The largest tenant in the collateral portion of the mall is a movie theater, yup. The anchor stores, a Macy’s and a Dillard’s, are not part of the collateral.

When the $164.3 million loan was securitized in 2011, the collateral was valued at $313 million. What could go wrong with lending $164 million against collateral worth $313 million?

You guessed it, mallmageddon, which started years ago. The loan was supposed to mature and get paid off in May this year. And that was a pipedream.

In October last year, the loan was moved to special servicing, with a default expected. Brookfield said that it would no longer support the property with infusions of equity, according to special servicer data.

Now the special servicer cited a new appraisal of the collateral: $88 million, down from $313 million at securitization, a haircut of 72%.

If the collateral is actually sold for $88 million, the lenders, which lent $163 million on $313 million in collateral, would walk away with a loss, before fees and other costs, of 46%.

Valley Hills Mall (Hickory, NC): -66%

Owned by Brookfield Properties, yup, again, the nearly 1 million sq. ft. mall had four anchor stores, now down to three and an empty box after the Sears store closed in April 2020. The other three anchor stores are Belk, Dillard’s, and J. C. Penney. Belk and J.C. Penney filed for bankruptcy in 2020 and have now emerged from bankruptcy.

Brookfield has already removed the mall from its list of malls that it owns, having already walked away. Now it’s just a matter of sorting through the debris.

In 2013, a 325,166 sq. ft. portion of the mall – which doesn’t include the four anchor store locations – was used as collateral for a $57.9 million loan that was then securitized into CMBS. At the time, the collateral was valued at $97.9 million. What could go wrong lending $57.9 million on $97.9 million in collateral?

Mallmageddon. In September 2020, the loan transferred to special servicing due to payment default.

Now the special servicer, cited by Trepp, noted that the collateral value was reduced from $97.9 million at securitization to to $33.1 million, a haircut of 66%.

If the collateral is actually sold for $33.1 million, the lenders, having lent $57.9 million on $97.9 million in collateral, would pocket a loss before fees and other costs of 43%.

Jefferson Mall (Louisville, KY): -66%

The nearly 1-million sq. ft. mall with four anchor stores, owned by CBL & Associates Properties, borrowed $59.5 million in 2012, secured by a 280,000 sq. ft portion of the mall. At securitization in 2012, the collateral portion of the mall was valued at $101.7 million, for the purpose of selling the CMBS to investors.

What could go wrong lending $59.5 million on $101.7 million in collateral? You guessed it. Mallmageddon.

In September 2017, Toys ‘R’ Us filed for bankruptcy and was liquidated in 2018, and all its stores were closed, including the store at the Jefferson Mall, one of the four anchor stores.

In 2018, Sears announced it would close a whole bunch of stores, including its store at the Jefferson Mall, which closed in January 2019, leaving behind an empty box. Dillard’s and JC Penney are the remaining anchor stores.

In November 2020, the mall’s owner, CBL & Associates Properties, filed for bankruptcy.

This summer, the collateral’s value was reduced from $101.7 million at securitization to $34.7 million, a haircut of 66%.

If the collateral is actually sold at $34.7 million, the lenders – having lent $59.5 million on $101.7 million in collateral – will book a loss before fees and costs of 42%.

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  112 comments for “Mallmageddon: How Far the Value of Four Live Malls, Not Zombie Malls, Collapsed this Summer

  1. leanFIRE_Queen says:

    Turn them into housing, problem solved.

    It’s possible that they were overvalued initially, don’t remember the last time I’ve been at a mall. Pretty boring places imho.

    • Wolf Richter says:

      leanFIRE_Queen,

      The only way to turn a mall into housing is to tear all or part of it down and build entirely new apartment or condo buildings on it, from scratch. Most of the land of a mall is parking. So you can build a lot of housing units on the dirt of where the mall used to be.

      This is being done, for example, right here in San Francisco, where property values are very high. Stonestown Galleria is in an area that is good for housing. The owner of the mall, Brookfield, isn’t walking away from this mall due to the high land value. They’re actually planning to tear part of the mall down and build thousands of housing units on it (currently in the permitting process).

      But it’s not necessarily a financial winner with a mall out in the suburbs, where property values are low. But this is part of the math. If the property value is low, the mall goes back to the lender, which may eventually sell it to a developer for cents on the dollar – and at a huge loss for the lender, much bigger than the losses for a live mall that you see in the article.

      And the developer will then tear it all down and build entirely new buildings on it, most likely a mix of apartment and condo buildings and maybe some office and a little retail, such as a grocery store and cafes/restaurants/nail salons.

      • georgist says:

        The value is in the land under the mall.

        Hudson estimates more than 60% of property value is land value.

        60% of real estate is created by society yet is captured almost exclusively by private actors.

        Adam Smith called them rentiers. So did Keynes.

        Be like Friedman: tax land, not labour.

        • Cas127 says:

          “60% of real estate is created by society yet is captured almost exclusively by private actors.”

          Vey…so tiresome.

          Even if true (and I lack the energy/desire/interest in going round and round with a Georgist right now) it is hard to get thrilled by the prospect of transferring “private actors” arguably unjustified gains to that old wheeze representative of “society” – the G, author of ruins like Afghanistan, Mosul, insane medical inflation, insane education inflation, ZIRP driven housing inflation, etc.

          If a car is on fire, the problem isn’t that it doesn’t have enough gas in the tank…

        • Thomas Roberts says:

          georgist,

          A land tax is better than property tax. However, there is no replacement for income taxes; nothing can come close to replacing the amount of money income taxes brings in. The only way to compensate for the loss of income taxes is to eliminate social security and to very greatly reduce public Healthcare. Also, don’t think the magic stock market can cover everybody’s retirements, you’ll work till you drop and if you can no longer work at best, you’ll end up in an extremely unpleasant group shelter, if family members don’t take care of you.

          On a semi-unrelated note, Friedman was an original advocate for replacing the FED with AI.

          #ReplacePowellWithAI
          #ReplaceFEDWithAI
          #MiltonFriedman

        • RightNYer says:

          Cas127, put this into google and click the link to the txt file:

          “0001539497-20-000737.txt”

          This is a standard Goldman CMBS securitization. Scroll down to “Summary of Certificates and VRR Interest.” You can see the “Offered” certificates which are public, and the Non-Offered which are private. This lets you see how losses are allocated to the bottom of the stack first.

      • Ted says:

        Its amazing to me that the lenders have no recourse to go after the “owners “ of these properties . How is this possible?

        • chillbro says:

          That’s the deal they negotiated for themselves lol

          Contract law

        • otishertz says:

          Loans secured with the property, neophyte.

        • Cas127 says:

          Ted,

          Commercial borrowers “usually” have to put up 30% to 35% of the purchase price (value at securitization) as a down payment,

          That DP is in the first loss position, so it is annihilated in situations like these. The banks’ still have their loans at risk…but they get 100% of collateral salvage value – the borrowers get zeroed out completely.

          So, not as good as having personal borrower guaranties or rights to deficiency judgments, but the borrowers’ initial 30% to 35% was initially viewed as a big cushion to falling valuations.

          But valuation is a black art operating on assumptions that render total values, very very sensitive to small changes in those assumptions.

          Basically, it is just the Discounted Cashflow Formula…but in one off real estate deals those cashflows rely upon a small number of payor lessees, who can go kaput easily.

          Thus the crying need for things like CMBS, which provide lessee and geographic diversification.

    • Old School says:

      I watch closely the big outlet mall that has it’s headquarters close to me. I don’t own the stock right now, but would buy if cheap enough.

      They have sold off about five problem centers, but they said the remaining 39 are all cash flow positive. A few of their best centers are at 100% occupied.

      It will be interesting if they survive or will keep selling off their marginal properties as they become cash flow negative.

      • gametv says:

        100% occupancy might only be due to the lease terms with retailers, once the retailers lease term expires, they can close stores.

        With all the stimulus money many of the retailers have been fine due to the push to ecommerce. That has propped up otherwise disasterous sales through stores. This whole thing will collapse at a later date.

        • Joe Saba says:

          Park Mall Tucson – very busy but anchors have left – covid didn’t help
          I wouldn’t doubt local investors will be ready to step in for price

          this was sold 15 years ago to settle estate and they got PREMIUM price for it

          just like El Con mall did when GENERAL GROWTH dipped it’s toe for that mall also
          the HEIRS thank you

    • Old School says:

      I have been to the Hickory Mall a bout four years ago and it had hardly any customers during a weekday. I suspected they were in trouble.

      Since it was built there had been more retail built up close by that offered additional competition. It’s a pretty small town to support a big indoor mall as well.

    • otishertz says:

      Meanwhile I read somewhere that amazon has plans to build brick and mortar retail locations.

      Hahahaha, says the space cowboy. He also t hanks for building him a multi billion dollar toy spaceship for him and his nephew and an old dude named Wally.

  2. Auldyin says:

    All this damage at near zero rates.
    Just imagine the carnage here and elsewhere at 5%.
    Never going to happen, they’ll QE into it for ever. They would QE into this by buying CMBS if they were allowed to.
    It would be interesting to see what they would do if a pension fund or a bank or something systemic was under threat due to an investment in some of these things.
    Just askin’?

    • Tom S. says:

      Infinite central bank credit seems like it would end poorly, if history is any indication.

      • Old School says:

        Yep. Hard money gave government three options when they got in trouble 1) tax 2) confiscate 3) default.

        Fiat money gives them a variation that is much more pleasing to politician which is inflation a combination of all three disguised as one. It’s the ultimate power of DC. You can try to give them the finger by buying gold, but it’s no sure thing.

    • MonkeyBusiness says:

      At 5% all malls will be turned into soup kitchens.

    • gametv says:

      QE is limited in an inflationary environment. The Fed has painted itself into a really bad place and fired all its bullets in panic and now the charging lion is getting close.

    • jon says:

      There is no stopping of QE. More negative rates are coming. Real rates are already negative.

      • Depth Charge says:

        Negative rates just make things worse. What are you smoking? Think things through before posting.

        • Lone Coyote says:

          I read jon’s comment as a prediction of what will happen, not an endorsement.

          For what it’s worth, I fully expect the fed to keep QE up (justifying it by the stock market dropping as soon as tapering starts) until something completely breaks.

    • georgist says:

      The Fed don’t set rates, they follow them down.

      Rates are low because rentier activity reduces growth.

      Rates fall, rentiers get a boost, regulations remain, wealth creators become rentiers, growth falls, then rates fall, rinse and repeat.

      If rates were to rise rentiers would still be favoured from the point after rates change, leading to less growth, leading to lower rates, etc etc

      Are we really saying that the only problem with the West is low rates? That it will all just go away if this changes? That there are no other systemic problems in societies founded on the values of feudal societies.

      John Locke thought we didn’t need land taxation because he couldn’t imagine a time when empty land in the USA would be gone. If he could see the full enclosure and rentier activity now, based upon flawed reasoning and influence of states with monarchies, I bet he wouldn’t just be lamenting low rates. He’d want change at the root.

      Tax land, not labour!

      • cb says:

        Georgist said: “The Fed don’t set rates, they follow them down.”
        ________________________________________

        I will contend that the FED does set rates. They have been pushing rates down through interest rate suppression. Among other things they have digitized money to buy Treasuries and Mortgage Backed Securities.

  3. nick kelly says:

    BEFORE I got to the comments, I thought as I would be second to comment I’d say this: please let’s not have a bunch of the ‘convert to housing’ that crop up every time the mall topic comes up. There is a conversion industry but they don’t do malls, because it would be cheaper if it was just land. There have been hundreds of abandoned malls in the US for 20 + years. What is new is the plight of newer ones. Almost none are good candidates for conversion and that’s why they haven’t been. The only exception might be where there are two stories, so you can plumb kitchens and bathrooms without jackhammering hundreds of yards of concrete floor.

    Not even for the homeless? You can put them in an airplane hangar too. I’m talking about ‘housing’ not emergency shelter.

    • Harrold says:

      Come on, who doesn’t want to live in a giant concrete box with no windows and no plumbing?

      • Mary says:

        Every day in SF you see people living in giant cardboard boxes with no plumbing. As long as they get their drugs and free needles they are happy.

        • Tony22 says:

          Can’t wait for the Westfield Mall at Market and Fifth to go under. Bonus, it has a movie theater too!

          Supposedly the foundation for the “New Market Street”….LOL

          Convenient bathroom stop for the BARTing in drug dealers and hot goods sellers nearby.

          Bring back the Big E!

          (That’s The Emporium department store for you newcomers.)

    • Joe Saba says:

      not to worry – our local PLANNING AND ZONING will make it ultra expensive

  4. 2banana says:

    Any comments on Simon Property Group putting their “bad malls” into some kind of “special” holding shell company and getting them off their books?

    I don’t know how they do this legally.

    • Wolf Richter says:

      2banana,

      Here is an example where Simon used an LLC as legal owner of the mall that it walked away from. Creditors only get the collateral and maybe whatever else is in the LLC, which is likely nothing.

      https://wolfstreet.com/2021/07/21/creditors-foreclose-on-another-mall-of-simon-property-group-face-massive-loss/

      With non-recourse loans, the creditors in theory only get the collateral. But if there are issues, it could be that the owner of the collateral can be held liable. So it’s always better to put the collateral of even a non-recourse loan into an LLC. Real estate folks are really good about these legal protections, and lenders go along with it because they can get the collateral, which at the time they make the loan, always looks good. And lenders get paid to take some risks.

      • Augustus Frost says:

        Another reason they do it is because it’s usually someone else’s money. Moral hazard run amok.

        If you are a fund manager and you underperform your benchmark, you have a good chance of getting fired. Little incentive to be prudent in a mania.

        If a fund manager loses (most of) their clients money when most everyone else also does, it’s who could have anticipated that?

        Do any of these loans fall into the “covenant lite” category?

    • MarMar says:

      What do you mean, you “don’t know how they do this legally”? It’s called an LLC – literally a “limited liability company”. Its whole purpose is to shield the owners from liability. This is part of the foundational structure of the corporate form.

      • otishertz says:

        Yeah, essentially an S Corp with unlimited members (or one), pass through tax situation, and a change in terminology from “shareholders” to “members.”

  5. MCH says:

    Mallmageddon, is that a new phrase to be coined by WS?

    Very catchy, Mallmageddon featuring zombie malls, you could almost make a movie out of that.

    And from there, the savior will arise… in the form of Amazon, of course. I have heard stories about Amazon taking over spaces to put in warehouses, and a variety of other physical infrastructure. But I wonder if a mall is readily usable as that type of infrastructure space, I would guess you’d have to tear it all down, although in theory, the anchor store could be a warehouse tenant.

    I suppose Amazon could be going into a mall to put in their own branded store, heard that’s happening somewhere in the midwest, but that seems to be somewhat problematic given that Amazon would only have a single store, may be it can be a mixed use property. Warehouse plus physical store.

    But zoning aside, I’m sure someone will think of something creative to do with all of that land that starts to show up. Unlike office towers, there is actually quite a bit to build on.

    Rezoning isn’t out of the question though, one just has to look at what’s happened to Vallco mall in Cupertino to see that it is possible as long as enough money is greasing the way.

    • Wolf Richter says:

      “Mallmageddon, is that a new phrase to be coined by WS?”

      I don’t think so.

    • Ron says:

      Probably to merchandise all there returns has to be a shitload

    • Cas127 says:

      “zombie malls, you could almost make a movie out of that.”

      They have made it…and re-made it…”Day of the Dead”.

      What interests me more is the whole ZIRP infused, rhyming “Zombie Economy 2000-2020” (tagline – “It looked alive…but was really dead!!”).

      Day of the Fed.

  6. Ross K says:

    I’m certainly not versed in the loan side of commercial RE, but should the loan payments the lenders received be taken against the loss in value?
    On a practical level.
    i.e. 1st one Westfield Palm Mall
    $125M loan in 2014 with the mall as collateral if I’m reading that right. May 2020 it all fell apart and they defaulted, but 6 years of payments on a $125M loan. No idea on the terms, but not ‘chump change’.

    If they dump the mall for the $55M (if they can get it) then what’s the real loss?

    Or am I missing something?

    • Wolf Richter says:

      Ross K,

      Those are commercial mortgages, which are interest only.

      • Cas127 says:

        Wolf,

        Still…there is a bit of an offset from multiple years of interest payments and all the Meshuggah loan origination fees that nobody talks about.

        The lenders will take a bath on individual properties but they’ve been running this rodeo a long time and know how to protect themselves in most environments.

        But online retailing was a slow motion extinction level event for malls and all the loan fee/loan covenant/loan structuring jiggery-pokery wasn’t going to save them from the initial bad decision of making the mall loans at all/fatally underestimating online retail for a lonnng time.

        • Wolf Richter says:

          The lenders in this case are the CMBS holders, namely bond funds and the like. The bank that originated the loan got the fees. I don’t think it had to retain an equity state in the CMBS. The servicer was making fees, the special servicer is making fees. All these fees come out of the hide of the CMBS holders that will now also take the capital loss.

          CMBS are structured, and contain multiple loans. So this loss will hit the lowest rated tranches of the CMBS.

  7. MB says:

    Wolf what do you know about American Dream off the NJ Turnpike?

  8. Petunia says:

    I’ve seen a few videos of the deserted Palm Desert Mall. A popular utuber who lives in the area, is documenting the demise of the retail economy in his town and surrounding areas.

    I find it interesting that he never talks about the impact of losing the commercial side of town on residential housing prices in the same area. Since I consider good shopping a draw to an area, there must be some impact on house prices in the area.

    This is the reason I don’t trust Socal Jim. I’ve seen the videos of all the closed businesses in the San Diego Gaslight District, and can’t believe people would still be paying high prices for residential in that area. It’s depressing.

    • Augustus Frost says:

      In early 2018, I drove past Gwinnett Place Mall in Duluth GA, an Atlanta suburb. When I arrived at my work location, I asked a coworker why the parking lot was empty. I used to go there regularly in the early to mid 80’s (it opened in 1983) but not in a long time.

      He told me it was all empty, apparently except for Macy’s which still had cars in the parking lot. He also told me someone found a dead woman in the dumpster by the food court. Probably used to there to walk in-doors like I did with my mother at another one until about two years ago.

      I agree with you about the impact on local communities. It’s another part of gutting the economy.

    • MCH says:

      Petunia,

      In Oakland, there is a constant drumbeat of news around crime and such. Yet, if you look at sales over the last couple of months, it hasn’t tapered off much. Housing is still somewhat robust here, for example, a burnt out house in Walnut Creek, pretty close to Bay Area, went something like $100k over asking.

      Yes, ultimately the economy ties into housing, but the real economy around San Diego has very little to do with the gas lamp district.

    • gametv says:

      I can tell you in desireable areas of LA housing prices are still off the charts and there is still very little inventory. I dont think SoCal Jim is lying, but this is all just an issue of timing.

    • Harvey Mushman says:

      Just curious… is the youtuber you are talking about “Jeremiah Babe”?

    • Depth Charge says:

      Petunia – don’t you know real estate (housing) only goes up? C’mon, don’t harsh Jim’s mellow. I mean, sure, prime Manhattan residential can crumble, but certainly not the dumpy streets of CA.

    • Robert Hughes says:

      Past resident of Palm Desert. Bought a mattress at Sears mall store, just before their demise there. Mall was scary cira 2019 with all sorts of scum walking about. Stuff Pizza with outside entrance, Dicks sports, same were okay. Inside scary and dead unless you were teen girl / boy shopping for clothes, nothing for any mature person. A 2 level mall going , gone and done. Easy to go over to El Paseo, but that too has its issues but still pretty much alive.

  9. SpencerG says:

    I guess that I am confused about how a CMBS works. Take the second mall that Wolf lists. The loan was securitized in 2011 and “the loan was supposed to mature and get paid off in May this year.” Since the loan was 80% paid off even before COVID hit… assuming that the owners stopped making payments then… wouldn’t the CMBS loss be only for 20% of its face value? The lenders have already been paid the rest.

    Or does this work differently somehow?

    • Wolf Richter says:

      Interest-only commercial mortgages. 100% of the principal is due on maturity date.

      • Lauren says:

        Can you explain why this situation makes sense for the borrower? Is it the ability to walk away easier?

        • Wolf Richter says:

          Lauren,

          If the borrower (landlord) has to pay interest on a $100 million loan, and then has to pay off the $100 million loan on a mall that is losing money, and is going downhill, like many malls, then the borrower would accomplish at least things by walking away:

          1. save $100 million
          2. save the interest for the remaining term of the loan
          3. get rid of a money-losing investment (it might also be cash-flow negative) that lost 70% of its value if it were sold today.

          The equity investment, if any, would be lost, but that is “sunk capital,” which was lost a long time ago.

        • otishertz says:

          It makes sense if a company thinks it can pay back the principal balance before the inevitable balloon when the principal balance is due – or forfeit the property.

          Business profits compound at a much higher rate than passive income but they come with concomitant risk.

          Risk has been sublimated by forced low interest rates. Meanwhile, corporations with credit are surreptitiously raping the banks and will walk away from the carnage while the Fed holds the CMBS bag.

          I’d laugh if I could stop puking.

      • SpencerG says:

        Thanks for the explanation.

        1) It is very hard for me to feel ANY sympathy for some entity which offered an interest-only loan on a nine-figure property. That would be like me giving someone else money to go gamble with in Vegas.

        2) I assume (probably wrongly) that there are some forms of mortgage insurance for these loans as there are in the residential markets. Otherwise I am having a hard time seeing why these loans would be offered at all. Granted that money managers are all “chasing yield” but that doesn’t work if you are likely to get the yield but lose the principal.

        • RightNYer says:

          1) Why would that entity care? Mortgage originators sell their loans to securitization trusts usually within a few months of closing. Their only real exposure is that few month period. Those that lose are the bondholders of the CMBS trusts. Only the very best loans are held on balance sheet, and usually be insurance companies.

          2) No, there’s no mortgage insurance. They rely on the appraisal and a certain LTV ratio, and an adequate debt service coverage ratio (meaning a function of how much of cash flow is needed to make P&I, or just interest payments).

          These securitizations always have multiple tranches, with the bottom ones the first ones to take losses, but also with higher yields. The bottom tranches are bought by what is known as a b-piece buyer, who supposedly does the diligence. They’re usually investment funds or the like. But if the value drops by 60%, they’ll be completely wiped out, and even the top rated A certificates will take losses.

        • cas127 says:

          RightNYer,

          “But if the value drops by 60%, they’ll be completely wiped out,”

          I wonder what the initial loss/total loss breakpoints actually are for the toxic tranches at the bottom of CMBS structures – I think they are much lower than 60% aggregate structure losses.

          You really have to be suffering from ZIRP induced madness to play at the bottom of the pool…don’t CMBS buyers realize the huge moral hazard/adverse selection conflicts of interest that loan originators face when they plan to sell off all loan risk?

        • fajensen says:

          I assume (probably wrongly) that there are some forms of mortgage insurance for these loans as there are in the residential markets. ….

          These loans are offered because of Securitisation. They can be repackaged as higher-yielding bonds. Those are then sold off in “The Market”, diluting away the risk, like they are gonna do with the Fukushima water.

          The output, be it MBS, Total Return Bonds, SDO’s and what not are marketed Directly to “sophisticated investors” or “retail”, a.k.a. Suckers, via REITS.

          The instigators, originators and re-packagers collect their fees up-front, what happens later is nobody’s problem.

          PS: In Denmark, residential mortgage bonds are traded directly on the Copenhagen exchange. There is no mortgage insurance (other than one can take a private insurance to cover ones own mortgage in case of death or illness).

      • Cas127 says:

        Wolf,

        “100% of the principal is due on maturity date.”

        This is why aggregated maturities/rollover dates matter so much.

        If the market goes “risk off” at the wrong time (“Golly, this company/industry/nation has debt 5 times in excess of revenues…how did we miss that?”) markets can easily smash into interest-rate-spiking “Walls of Maturities” (and we’re back to the Fed taking CEOs’ toothy grins as collateral in order to “normalize” rates at 2%…)

        “How did my corporation go bankrupt? Slowly…then all at once (when I couldn’t find a successor sucker among lenders).”

        Would love to see more “Maturity Wall” posts.

    • RightNYer says:

      Because commercial mortgage loans are never fully amortizing. Some are interest only, and some mature after 7 or 10 years, but amortize on a 30 year schedule. So at the 7th or 10th year, even if it wasn’t interest only, you’d have a huge balloon payment due. At that point, the sponsor gets a new loan and refinances the old one.

      The problem starts when the value has dropped, as no new lender will make a loan that is enough to pay off the old one. So then the loan goes into what is called maturity default.

  10. So is this a blemish on their credit or it doesn’t matter.

    • Depth Charge says:

      Just close shop then incorporate under a different name. Problemo solved.

  11. Maximus Minimus says:

    Does the credit rating of these management companies go down or up? You know, for being smart to offload the risk.
    Does the notional rating of the the investment funds go down?
    You know, what you do in a broken system, throw darts as investment strategy?

    • Cas127 says:

      “these management companies”

      If you talking about CMBS managers, that is a verrry interesting question.

      They tend to be tiny, obscure shops, with little history (and likely less future), and emit a strong odor of incest from their relationships with loan originating banks, from whom they buy their loan portfolios.

      Granted, the lengthy, convoluted MBS documents define investors’ rights…but almost all MBS strike me as troublingly X-Files given their outsized role in the MBS ecosystem.

      They are sorta like mutual fund managers/families…but much, much, much more obscure.

      I think there is a strong possibility that many of them are little more than risk-offloading cutouts for the originating banks…who see to it that MBS managers are little discussed in the financial press.

  12. Gerry says:

    If Brookfield Properties is the same entuty as that which signed the $1.2 billion lease in 2019 at the Jared Kushner-owned 666 Fifth Avenue NYC office building (with all the lease payments supposedly paid up front). someone at Brookfield should have been canned for incompetence. But not in this Twilight Zone economic world.

  13. John says:

    So basically CMBS will get bailed out because nowadays the powers that be operate under the “we’ll prop up anything and everything” mantra?

    • Wolf Richter says:

      John,

      No one directly bailed out these CMBS. The Fed only bought apartment CMBS that were guaranteed by Fannie Mae et al.

      But the near-zero interest rate environment has produced a chase for yield that pushed up prices of all bonds, even those that are in bad shape. And this has helped those CMBS immensely.

      • Dave says:

        Wolf,

        as a follow-up, it would be very interesting to compare the performance of different mall CMBS. I believe most of them got hit in a similar way when the pandemic started out in March 2020. Since this market is one of the few which has NOT been directly manipulated by the FED and market price discovery is still possible, there must have been a K-shaped recovery I assume. Some mall CMBS end up losing (similar fate as the ones described in this article), others make a comeback (those where property values are very high and the borrower keeps on paying the interest payments for the loan to the CMBS investors)

  14. David Hall says:

    Macy’s is rapidly growing sales and income.

    The largest mall operator Simon Property Group has seen growth in profits as vaccinated shoppers ventured out into retail space.

    • Wolf Richter says:

      Macy’s is rapidly growing sales and income from its online operations. There, fixed it for you.

      • MCH says:

        Macy’s like many others have figured out that their retail locations are nothing more than showrooms and warehouses for online.

        I wonder how easy it is to use a former anchor store as a warehouse.

        • Raging Ranter says:

          Retail spaces are just places to return stuff bought online. Although I have to admit the Tanger Outlets here in Kanata (West Ottawa) has been packed every since the reopening after COVID shutdowns.

        • Swamp Creature says:

          I haven’t been in a Macy’s for at least 10 years. Went in to buy a wallet to replace mine which I bought there 10 years prior. Pretty nice wallet. Folds into three with plenty of room for a few credit cards and ID’s. The salesman didn’t have any change. Had to walk across the store to the other side to find a cash register to make change. He told me no one pays cash for anything anymore, and asked me if I wanted to open a Macy’s charge card.

    • Michael Gorback says:

      There’s a whole lot more to SPG. See my comment below.

  15. Swamp Creature says:

    One Mall near here in VA, The Dulles Expo Center is being turned into an Afghan refugee resettlement center. They’ve flown five fully loaded 747’s into the airport near the center already. More on the way.

    • Depth Charge says:

      How lovely. Has anybody asked these braindead politicians about the US refugees living in tents on the concrete of the good ol’ USA?

      • MonkeyBusiness says:

        Oh come on. We all know #AfghanLivesMatterThisYear ;) The last 20 years, our drones in Afghan killed babies pretty regularly, yet nobody gave a peep. This year though even AirBnb thinks Afghan people are cool.

        • Cas127 says:

          The Great AirBnB Afghan Giveaway is a bit like donating my neighbor’s car to charity.

          When twitterati pointed this out, AirBnB Public Relations got a little pissy.

        • MCH says:

          Would be curious to see what happens if the hosts decline? And also, what compensation are provided to the hosts who agree.

          The neighbor’s car analogy is really apt here.

          I like this idea around sharing economy, where the things being shared is someone else’s property and being handled via corporate app.

      • Augustus Frost says:

        US foreign policy screwed up again so it’s supposedly an obligation.

    • Old School says:

      We broke it, we own it sad to say. Not sure the solution. I heard one guy say that no healthy male should be evacuated because if you will not fight for your mother country, you deserve what you are going to get.

      Who knows? Out of my control.

      • Taxman100 says:

        “We” didn’t break it – the ruling class in D.C. broke it.

        20 years of war enabled the Deep State to get filthy rich, and now they get to import new voters who will just happen to vote by mail the way the Swamp Creatures in D.C. want.

        • Cas127 says:

          When I hear 70,000 Afghan translators (when US troops peaked at about 110,000), it is hard not to think…that is 7 full infantry divisions that could be organized.

          And it is impossible to consider the 300k paper Afghan troops letting 75k Taliban walk through them, without immediately recalling the fall of Mosul in 2014, when 400 ISIS smashed an alleged 2 full Iraqi armored divisions (20k troops and hundreds of tanks on paper) using unarmored Toyota truck technicals.

          These defeated ghost armies could not exist without many thousands of US political class members knowing about it in detail. They have been on intimate terms with these nations for 20 years.

          But they would never alert the other 330 million of us about it…because how would they skim tens of billions otherwise?

          Until 330 million US citizens realize that some of our worst enemies are already inside the wire in DC, the US will never win another war.

      • drifterprof says:

        “I heard one guy say that no healthy male should be evacuated because if you will not fight for your mother country, you deserve what you are going to get.”

        I, for one, 100% definitely would not fight for my mother country (the U.S.A.) if the war was mainly a vile hypocritical geopolitical struggle having nothing to do with maintaining a viable culture, and nothing to do with directly defending the homeland, and defending whatever constructive personal freedoms still existed, etc. etc.

        In the case of Afghanistan, the males were not fighting outsiders for their traditional mother country. If one could identify an Afghanistan mother country, one could argue that the Taliban was fighting for it more genuinely than the military created by U.S. money and it’s puppet regime.

        The U.S. bought and paid for the Afghanistan males who worked for them in an attempt at nation-building the country Western style. Letting them die for their efforts would not build up confidence in the United States reputation for protecting its clients.

      • Augustus Frost says:

        Except that there is no “we” in this equation. There is no equivalence between the individual citizen and their government.

        My father said the same thing about the Syrian situation. American voters elected these psychopaths, so presumably that’s the rationale for this thinking.

        Good thing I’ll be dead before the worst of the consequences come to fruition from the balkanization of this country.

    • Ethan in NoVA says:

      Hey neighbor! I drive by it checking it out every once in a while.

      The people are coming in and leaving pretty quickly as I understand it.

      Also, it’s not really a mall, it’s a commercial space rented out short term for events. Model train shows, Lego shows, AK-47 sales, etc.

  16. otishertz says:

    Most old malls are crap construction. Look how quickly they deteriorate when abandoned. Malls are shopping stalls, that’s it. There was no effort towards permanence. Level them all and return boutique diversity to the street level.

  17. marie83 says:

    Oh Dear Westfield Palm Desert Mall, if only you had kept the indoor ice skating rink perhaps the kids of Palm Canyon and streetfair wouldn’t have cursed you so many years ago…
    Hmm, wonder how shops on El Paseo are doing.

  18. T S says:

    A good place for light manufacturing (first floor for the machinery), increase import tarriffs

  19. Michael Gorback says:

    Although at least half the malls in existence will go the way of the dinosaurs, it’s premature to dance on the graves of all malls. The class C malls don’t stand a chance. B malls might.

    Malls have already been converted to mixed use. And no, you don’t always have to bulldoze them. This was discussed on this blog weeks ago by somone who has done conversions. He blew up the meme that such conversions are impractical.

    The oldest still-functioning mall in the country, Westminster Arcade in Providence, was converted into tiny apartments averaging 225 sf with rent of $800/month. There are 48 micro lofts and 17 boutique stores. The mall closed in 2008 and was scheduled for demolition. Instead, the owners renovated it, putting retail stores on the first floor and micro lofts on floors 2 and 3. The tiny home movement has come to the mall.

    Multistory buildings have been converted to mixed use, not demolished.

    Check out Belmar in Lakewood, CO. It had a 60% vacancy rate. Now it’s home to 2,000 residents and generates $200 million in retail sales. 76 stores, 20 restaurants, and a block of artist studios. They created an entire community in the middle of the city.

    Perhaps the smartest player in the game is SPG. They spun off their crap malls into another REIT which then went under.

    They kept their premier properties. Their portfolio is A-rated.

    Then they bought the bankrupt or distressed retailers like Barney’s, Forever 21, Aeropostale, Brooks Brothers, Eddie Bauer, Lucky, Prince, Frye Boots, and Thomasville. Where do you think these stores will be located? SPG will capture both rent and retail sales.

    They recently raised their dividend 8% after taking a 40% cut in 2020. You don’t raise dividends if you think business is going south. They have a huge war chest and can borrow for under 3%. From 2016 to 2020 while malls were dying (pre-pandemic) SPG raised its dividend by over 30%. Look at the stock price action. Someone believes. This is an amazing management team.

    Amazon can’t do everything.

    They can’t repair your car or clean your teeth.

    They can’t check your vision.

    You cannot go bowling on Amazon.

    You can’t live on Amazon.

    You can’t dine at Amazon or rent a hotel room.

    They can’t cut your hair.

    They don’t do mani-pedis or massages.

    You can’t go into a cigar boutique and enjoy a stogie.

    There are no pilates classes or gyms.

    Imagine a renovated mall with living quarters, restaurants, nail parlors, restaurants, hair stylists, gyms, health clinics, auto repair, and retail stores that you can walk to in minutes.

    Despite WFH, there will always be a need for office space.

    Just do a search for mall redevelopment. Go look at Providence Arcade or Belmar online and see the renovation and innovation. Omelets and broken eggs a la Schumpeter.

    • Wolf Richter says:

      Michael Gorback,

      “Perhaps the smartest player in the game is SPG. They spun off their crap malls into another REIT which then went under.”

      Yes, totally agree, they’re the smartest out there. And they too have walked away from a bunch of malls, starting before Covid, and dished out huge losses to CMBS holders. They totally master this game of shifting losses to CMBS holders.

      • cas127 says:

        “shifting losses to CMBS holders.”

        Given the esoteric nature of the CMBS mkt, you’ve gotta believe that key institutional investors (like already inadequately funded public pension funds) are buying at least some CMBS.

        So as that mkt fails, public pension funds become the next domino.

        In a modern economy, everything tends to affect everything else.

      • Michael Gorback says:

        I’m not arguing morals here Wolf, just responding to the folks who think malls are road kill.

        However, before you pass judgment recall that CMBS deals are business/contractual transactions between private entities. No one is coerced into these processes. Have you or anyone you know ever been forced to buy CMBS?

        Furthermore, there was a lesson to be learned from the GFC and apparently some people missed that class, just like the yield-chasing suckers bidding up junk bonds.

        I distinctly remember getting hosed by GE back when they announced the dividend was safe, then the insiders dumped and subsequently cut the dividend. They got away with it and I was a bag holder.

        I invested in a private placement for a clinical lab that got busted for fraudulent billing and went bankrupt. I had no recourse.

        Shit happens all the time in business.

        The truly immoral processes are the violations of the social contract between 330,000,000 people and their government (as discussed today elsewhere on Wolfstreet such as the rent moratorium with plans to reimburse the landlords) .

        We’re going to get hosed on student loans which, IMHO, were intended as a way to slip money over the transom into the economy from the very beginning. Vast amounts of money were lent into existence and spewed directly into the economy.

        We are coerced into these deals without consent.

    • Nick Kelly says:

      ‘Instead, the owners renovated it, putting retail stores on the first floor and micro lofts on floors 2 and 3. The tiny home movement has come to the mall.

      Multistory buildings have been converted to mixed use, not demolished.’

      Common factor: an upstairs which is essential to even consider conversion.
      Of course multi- storey buildings have been converted. The multi- storey office building with WINDOWS and plumbing is the best candidate.

      PS: 800 bucks for 225 sq. ft ??.

      If I recall the guy who commented how easy mall conversions were. WR told him he was wrong and signed off.

      • Michael Gorback says:

        The simple fact of the matter is that some malls can be and have been converted. Some of the successful redevelopments were properties that were vacant for years.

        Obviously if Wolf told that guy he was wrong we need to re-think that assessment. If that guy has done mall redevelopment like he says I don’t blame him for leaving after being told he was wrong.

        There’s no future for class B or C malls. Redevelopment is for class A.

        I’m not gathering statistics on how many levels you need but I can tell you one factor to consider: don’t try it in California. Every project I researched ran onto the rocks of Prop 13, NIMBYism, municipal short-sightedness, etc. Look up the Crenshaw project in LA or Hilltop Mall in Richmond.

        I see no reason why a single level mall couldn’t be surrounded by new multilevel construction in the parking areas. I don’t know about single level mall expansion but for houses building up is cheaper than building out.

        Rent:

        Depending on location $800 for 225 sf is a bargain. Zillow is your friend.

        SF 920 Van Ness Ave 475 sf for $1395. 1010 Bush St 120 sf for $1000.

        Staten Island 500 sf for $900.

        My little burb south of Houston 698 sf for $980

        Providence RI where the Arcade Mall is 400 sf for $875. BTW take a look at the interiors of those units. These are not just 4 wall boxes and you can step out your door to

        These are pretty much the lowest rents I could find using a quick low-to-high sort.

        Microlofts are available for rent at

        Carmel Place in NYC
        Boston’s Factory 63
        Moda 17 in DC
        Turntable Studios Denver
        Coze Flats Miineapolis
        Cubix in Seattle
        The Arthur in Portland
        Panoramic in SF
        One Santa Fe in Los Angeles
        The Ivy Lofts in Houston

        Try to keep up with the times.

        • Michael Gorback says:

          Edit: These are not just 4 wall boxes and you can step out your door to stores, restaurants, bars, a spa, a hair salon, etc.

  20. Harry Houndstooth says:

    Forbes reported yesterday that Amazon will be opening department stores of about 30,000 sq ft (instead of the usual 100,000 sq ft) featuring top brands in Ohio and California. Amazon is expected to collect far more information on the customers, such as what items they spend time with before making a purchase. Amazon surpassed Walmart as the largest seller of clothing in the U.S.

    But even if Amazon goes into an existing mall, who will fill the rest of the 1 million sq ft?

  21. Tex says:

    Who visits malls these days anyway – it’s usually a place where low value shoppers like to hang out mostly and not spend money. The 80’s are not coming back where a mall was a prime shopping destination. They need to explore other options like conversion into schools, storage centers, distribution areas, doctor offices, senior living, etc. Trying to turn it back into a B&M retail destination is a loser.

    • Michael Gorback says:

      Tex if you scroll up a bit I have addressed this. The redevelopment strategies involved mixed use. One re-do has an ice skating rink. Layouts often offer pleasant outdoor areas.

      Here’s a snippet from the post. The redevelopments are offering things you can’t get online.

      Amazon can’t do everything.

      They can’t repair your car or clean your teeth.

      They can’t check your vision.

      You cannot go bowling on Amazon.

      You can’t live on Amazon.

      You can’t dine at Amazon or rent a hotel room.

      They can’t cut your hair.

      They don’t do mani-pedis or massages.

      You can’t go into a cigar boutique and enjoy a stogie.

      There are no pilates classes or gyms.

      Imagine a renovated mall with living quarters, restaurants, nail parlors, restaurants, hair stylists, gyms, health clinics, auto repair, and retail stores that you can walk to in minutes.

      Despite WFH, there will always be a need for office space.

  22. CreditGB says:

    It doesn’t matter how much you can borrow, at what rate, or from whom. If you buy a dying asset like malls, the end is evident. Cash positive is fleeting and can disappear in months.

  23. Ethan in NoVA says:

    It’s a shame the malls can’t go into bankruptcy, be bought out then returned to the market with lower rents. Then they could serve the purpose they were built for. But the rents are kept high and businesses can’t survive in them.

  24. Swamp Creature says:

    I heard they are in the process of turning some bankrupt malls into refugee resettlement centers. They are thinking of turning the empty parking lots into soccer fields, since most of the refugees don’t drive, and are not allowed to under sharia law.

    Its part of the principal of “Highest and best use”

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