IS RETAIL COMMERCIAL REAL ESTATE THE NEXT FINANCIAL IMPLOSION?
There is much more happening in the rapidly rupturing retailing industry than a shift to online buying, a collapse in US shopping mall traffic and the decline of the "Department Store" model. Over two years ago Charles Hugh Smith and I produced a number of research videos ( 02 03 14 - THE RETAIL CRE DOMINO, 11 30 13 - LOOMING US RETAIL IMPLOSION: An Urgent Re-Think Required! ) outlining the alarming changes in US retailing. We revisited the current status of that work to find the rate of decline now even faster and accelerating.
The US as a 70% consumption based economy has supported the US having 10-20 times the retail floor space of other developed economies. Major fissures however are shattering this once stable, high yield commercial real estate 'financial mecca' that Insurance companies, Pensions, Trusts, REITS, Small Banks and Credit Unions have traditionally feasted on. Those days may be quickly coming to an end as smart investors are aggressively trying to reposition their portfolios first within this relatively illiquid market. What they see is:
- Looming higher refinancing rates and terms for rollover refinancing,
- Retail floor space pricing relentlessly under pressure from online shopping,
- Strong signs of CMBS underwriting deteriorating,
- Leveraged Loans and Collateralized Loan Obligations (CLOs) under pressure
- Expiration of the Terrorism Risk Insurance Act (TRIA) set to expire,
- Property Tax pressures from City and Local governments under mounting financial budget pressures,
- A potential US Recession since the business & credit cycles are "long in the tooth" for this expansion,
- A shift in demographics of the working age population and reducing buying patterns of a retiring baby boom generation,
- Real Estate Asset Prices that have likely peaked for this cycle,
- A major shift in buying preferences of the Millennial generation as they increasingly dominate retail purchases,
- A collapse of shopping mall traffic as a source of retail volume,
- A decline of the Department Store Model.
Possibly even a bigger concern of investors is what they witnessed during the 2008 housing crisis regarding financing. They see the risk exposures as potentially immense due to the securitization complexity of an industry financed through MBSs, Leveraged Loans, Collateralized Loan Obligations, Synthetic CLOs etc.,. The US housing industry imploded via comparably simple securitization product structures such as CDS's, CDO and ABSs. Few institutional professionals would claim they have a full grasp or understanding of all the creative and secretive means used to finance these modern multi-billion dollar commercial real estate projects. These projects are based on underlying assumptions of growth, rates, prices, sustained trends etc. which are now all under pressure.
This is a lot of empty commercial real estate space which needs tenants - and it doesn't include the 100's of store closing announced at Macy's, JC Penney, K-Mart, Radio Shack, Circuit City, Borders, Sports Authority ....
The wave builds daily!
A 35 minute video with over 30 supporting slides.