Another month has passed with several large retailers stating they were not able to make their May rent payments, after being forced to close their doors due to social distancing. Even before the pandemic hit, some large retail chains were already on the brink of closures. Since then, the financial impact in the commercial mortgage backed securities (CMBS) space has become very visible.
In what was already a challenged market, retailers like Urban Outfitters and Calvin Klein have stopped rent payments during the coronavirus shut down, according to a new report by Trepp. Their data shows retail loans accounting for a quarter of outstanding mortgage debt in the CMBS space, which only trails behind office space, which holds 27% of the debt.
Almost 11% of retail CMBS loans were as much as 30 days delinquent in April, up from 1.7% in March, according to CRE Finance Council, a commercial real estate trade group. In addition, Trepp say over 600 retail loans totaling $12 billion were reported having missed their rent payments in April, classifying them as status A loans (in grace period) or status B loans (beyond grace period). That’s compared to just 88 loans the previous month. If these borrowers did not make their May 1 payments, then they would not be considered 30 days delinquent.
The numbers also differ by state: “Analyzing the data by state, Vermont, South Dakota and West Virginia posted the highest delinquency rates in the retail sector with rates of 73.37%, 45.59%, and 24.51% respectively, for the month of April,” the Trepp report stated. “These three states posted proportionally high overall state delinquency rates of 49.26%, 40.55% and 15.31% as well.”
Several large retailers have announced closures recently. Bloomberg reported that Hudson’s Bay Co. (HBC) missed April debt payments on two commercial mortgage-backed securities totaling $3.2 million, including part of their financing for Saks Fifth avenue and other stores. While HBC is based in Canada, the securities, originated in 2015, financed 34 U.S. properties, including Saks locations in Beverly Hills, Chicago and Miami. JC Penney also missed a $12 million debt payment earlier this month. In a statement, the company said they made0 “the strategic decision to take advantage of the 30-day grace period to continue ongoing discussions with lenders and maximize financial flexibility,” as reported by CNN.
Retail is one of the most vulnerable sectors when it comes to effects of COVID-19, along with hospitality and student housing. Credit agency Fitch Ratings predicts CMBS loan delinquencies across all sectors to spike between 8.25% and 8.75% by the end of the third quarter in 2020, with hospitality and retail being hit the hardest. This rate is close to the peak of just over 9% delinquency rate in July 2011 during the Great Recession. Fitch expects retail delinquencies will increase 30% compared to March, to surpass its prior peak of 21.31%.
“Bankruptcies will be brought forward for weaker retail tenants,” stated Melissa Che, senior director at Fitch Ratings. “Fitch expects a number of retail tenants will stop paying rent in the short term, adding further cash flow pressure to those loans that already had weak performance prior to the coronavirus pandemic.” Retail properties with tenants in essential industries, like supermarkets, pharmacies and banks will be less affected, she added.