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JCPenney closings will cause more pain for CMBS

J.C. Penney Co.’s plan to close up to 140 stores later this year will deal another blow to regional malls and likely cause heavy losses in some loans packaged to support commercial mortgage-backed securities (CMBS).

According to Morningstar Credit Ratings, 39 JCPenney properties are at the most risk of closing. These stores could affect a balance of $7.29 billion in CMBS loans, the company said.

JCPenneyThe overall CMBS exposure to all JCPenney stores totals around $29.82 billion, Morningstar said. These are either anchor stores or so-called shadow anchor stores, which are located near malls.  

J.C. Penney Co. announced on Feb. 24 that it was closing its underperforming or aging stores and two distribution centers. Most of the closings are expected to take place in the second quarter of this year, but the retailer has not yet indicated which stores will close.

This follows closely on January’s announcement by Macy’s and Sears/Kmart that the chains would be shuttering a total of at least 218 store locations this year. Morningstar has estimated that the Sears and Macy’s closings expose a total of $3.7 billion in CMBS loan balances.

The impact of these store closings on the overall $800 billion CMBS universe is small. The losses on individual loans underpinned by regional mall properties that lose anchor tenants tend to be high, however, according to Morningstar.  

“The general feeling is that there probably is too much retail space from some of the folks that I have talked to,” said Edward Dittmer, a senior vice president with Morningstar.

Dittmer said online retailers, like, continue to draw customers away from traditional retailers, spurring consolidations and bankruptcies. “The internet retailers either take over categories, like they did with books and electronics, or they eat at you at the margins,” Dittmer told Scotsman Guide News.

The closings have not be limited to big-box retailers. Numerous non-anchor chain retailers, such as The Limited and BCBG, also have shuttered stores. Morningstar said the pain is typically felt in lower-quality regional malls, which have struggled to find replacement tenants once an anchor shutters. With the rise of online shopping, the overall brick-and-mortar retail industry is undergoing big changes.

According to a report by Cushman & Wakefield, there were 4,000 major retail-chain outlet closings in 2016, surpassing the record of 3,600 in shuttered storefronts in 2015. Also, last year saw 26 major retailer bankruptcies, the most since 2009 during the recession. The company also predicted that major retail chains would close some 5,000 stores in 2017.

In a recent report, Fitch Ratings noted that mall rents grew by 0.4 percent in the fourth quarter, the slowest quarterly increase in two years. Mall vacancies ended 2016 at 7.8 percent, unchanged from the year-end 2015, however. 

The sale price of retail properties has been more stagnate than other commercial asset types. Retail asset prices fell 0.1 percent in January over the month. In the aggregate, the sales prices of retail properties valued over $2.5 million remain below the peak reached a decade ago, according to the Moody's Investors Service/Real Capital Analytics price indices. Most other commercial property types have far surpassed their prior past peaks.  


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