As COVID-19 shuts malls and hotels, their owners fall behind on loans, setting the stage for a changed landscape

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Michael Braga, USA TODAY
Published 6:02 a.m. ET Nov. 13, 2020 | Updated 1:53 p.m. ET Nov. 13, 2020

Consumers are scared to go out and retailers are floundering. Is there a future for the traditional indoor shopping mall?

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New York’s historic Roosevelt Hotel shut down last month, the latest casualty of the coronavirus pandemic that has upended the city’s tourism and retail markets.

Many more hotels and retail properties in the nation’s biggest cities are struggling.

In the New York area, the owners of 43 hotel loans were delinquent on loans backed by $1.5 billion in bonds as of Oct. 31, according to Trepp LLC, a research firm that tracks commercial real estate markets.

Another 30 owners of shopping malls and storefronts in the Greater Chicago area were facing similar financial problems, with loans backed by more than $630 million in bonds.

And that’s two sets of borrowers in two of the hardest-hit areas of the economy in two of the biggest cities in the United States.

Coast to coast, more than a thousand hotel and retail borrowers have defaulted on more than $35 billion in loans since the coronavirus pandemic stalled travel and tourism and made visits to shopping malls unappealing, especially with easy online alternatives for consumers.

As it stands now, nearly 20% of all hotel loans and slightly more than 14% of all retail loans originated by commercial real estate lenders and packaged into securities that are sold to investors are now delinquent.

That’s fewer delinquencies than at the peak of the crisis in June. But problem loans are still at disturbingly high levels compared with previous downturns.

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“The pandemic has had the most immediate and dramatic impact on hotels and motels, as we’ve taken a vacation from vacations,”  said Jamie Woodwell, vice president of commercial real estate research at the Mortgage Bankers Association. “It’s also put a lot of stress on retail, where the conversion to online purchasing that should have happened over five years has accelerated and is now taking place over a matter of months.”

The result is that shopping malls are becoming obsolete far faster than expected. Nearly $20 billion in loans tied to malls anchored by the now-bankrupt JCPenney and Neiman Marcus department stores are now in default, according to Trepp LLC. 

Hundreds of America’s 1,100 malls are expected to shut down because of COVID-19 and pressures from online retailers, experts say, and as many as 25,000 stores will close this year, according to Coresight Research, a research and advisory firm. 

Neiman Marcus filed for bankruptcy protection in 2020. (Photo: jjbers / Flickr)

New York alone could lose 20% of its hotel rooms by the time the pandemic is over, according to Cushman & Wakefield. That’s 6,800 rooms that will be converted to some other use.

The shakeout across the country is already causing hotels to lose 20% to 30% of their value, according to the Avison Young brokerage firm.

“The hotel industry has been devastated by this pandemic,” said Stephen Michels, the managing director for Cushman & Wakefield’s hospitality practice. “The combined impact has been greater than 9/11 and the financial crisis combined. It’s been very painful for a lot of owners.”

Occupancy rates across the country dropped to 33% for the three months that ended June 30, from 70% during the same period in 2019, while average room rates dwindled to $83 per night from $133, according to Cushman & Wakefield.

This, in turn, led to 738 borrowers defaulting on hotel loans backed by about $17 billion in bonds as of Oct 31, according to Trepp LLC.

That’s down slightly from July. But according to Michels, the Cushman & Wakefield analyst, hotel delinquencies were never this high during the Great Recession.

Once a vaccine has been identified and delivered, Michels says the hotel and motel industry will begin to recover and should be back to full strength by the beginning of 2023. Leisure tourism is expected to bounce back first, followed by corporate travel and finally by group travel and international tourism.

As COVID-19 shuts malls and hotels, their owners fall behind on loans, setting the stage for a changed landscape

Stephen Michels, Cushman & Wakefield's managing director of hospitality (Photo: courtesy)

“Large citywide convention and major group bookings have longer lead times than leisure travel,” Michels said. “It takes six to nine months for the group market to get back into full swing.” 

In the meantime, however, Michels expects a lot of owners to default on their loans and a lot of properties to change hands. In some markets, like New York, there will be a large decrease in total hotel rooms before the shakeout is over. 

“A significant number of hotels will be converted to workforce housing or senior housing or some higher better use,” Michels said. “These will likely be older hotels, with inefficient layouts, and unionized labor structures.”

No longer postponing the inevitable

For shopping malls and storefronts in urban areas, the carnage wrought by the coronavirus is just an acceleration of the retail-apocalypse that was supposed to occur anyway, thanks to Amazon and the trend toward online shopping.

“It was looking pretty bleak pre-Covid because of the transition away from bricks and mortar,” said Manus Clancy, senior managing director applied data, research, pricing at Trepp LLC. “We had been seeing a wave of bankruptcies – big, medium and small. Mall occupancies were dropping from 98% then 92% and down to 86%. Big retailers like Macy’s and Nordstrom’s were closing stores.”

As COVID-19 shuts malls and hotels, their owners fall behind on loans, setting the stage for a changed landscape

Manus Clancy, senior managing director applied data, research, pricing Trepp LLC (Photo: Courtesy)

With coronavirus, the bankruptcy trend has only accelerated, Clancy said. 

“We will see dozens and dozens of loans go into default and lenders will only be able to recover 30 cents on the dollar,” Clancy said. Lenders that made $100 million loans will only be able to collect $30 million.

As with hotel loans, many loans to these shopping mall owners and large retailers are made in the CMBS, or commercial mortgage-backed securities, market, Clancy said. That’s because these loans are very large – often $100 million to $150 million apiece. So they need to be parceled out among a broad pool of investors.

Trepp LLC counted 652 delinquent retail loans totaling about $18.9 billion in the CMBS as of Oct. 31.

The first investors who will be affected when these loans go bad are big private equity firms like KKR, Clancy said. They are the ones that hold the riskiest pieces of the loan packages. The next to be impacted will be private money managers and hedge funds, who hold the next riskiest pieces. Then pension funds and the big mutual funds that manage money for retirees and average investors.

Unlike in the Great Recession, Clancy does not expect retirees and average investors with 401(k) plans to be as affected by loan defaults this time around.

“Nobody is predicting the problems to reach that high,” he said.

Still, owners of retail properties, especially owners of second- and third-tier malls that have lost their anchor tenants, will get crushed. Some of those malls, which were once valued at $150 million, may get repurchased by a company like Namdar Realty Group for $30 million, That will enable them to continue functioning as malls, Clancy said. But other properties will have to be repurposed.

As COVID-19 shuts malls and hotels, their owners fall behind on loans, setting the stage for a changed landscape

Nordstrom was shuttered at Barton Creek Square mall on Wednesday. Austin’s largest shopping mall operator Simon Property Group said Wednesday that it was temporarily closing its centers due to the coronavirus outbreak. Plunging sales tax revenue could badly hit the state and cities. (Photo: JAY JANNER/AMERICAN-STATESMAN)

Mall operator Simon Property Group, for example, is reportedly in talks with Amazon to convert department stores into e-commerce fulfillment centers. Other malls will be converted into office space or used for community colleges, while others will be knocked down and turned into multi-family housing.

In big cities, storefronts are not as likely to be repurposed. Overpriced properties will simply change hands and rents will come down, Clancy said. 

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