Market Extra: Underwater: Values on dozens of U.S. malls slashed by more than 70% during pandemic

Here comes more trouble for embattled U.S. shopping malls.

New York’s biggest shopping center, Destiny USA, a lakeside mega mall that helped transform Syracuse’s formerly polluted and downtrodden industrial Oil City neighborhood 30 years ago, has seen its share of ups and downs.

Now, the roughly 2.4 million square foot shopping, hotel and entertainment complex might be best known in debt circles for having lost a stunning $500 million, or 71%, of its value since 2014, when the property was financed last, according to data from commercial real estate analytics platform CRED iQ.

It’s far from alone. A turbulent chapter for many of America’s malls has begun to unfold, a decade since a flood of property owners tapped Wall Street for debt that was relatively cheap and easy to come by, but no longer.

Including Destiny USA, a total of 45 U.S. malls with $3 billion of property debt have seen their values deeply slashed by at least 70% during the pandemic from their most recent financing, according to a list complied for MarketWatch by CRED iQ.

The starkly lower values put many mall owners underwater, leaving them owing more debt than a property is worth, a potentially dire situation that can spark fire sales, losses for creditors and a downward spiral for property prices.

“From a historical perspective, we know that retail has been substantially overbuilt for decades. That issue was coming to a head before the pandemic, which was a tipping point for the sector,” said Lisa Knee, a tax partner and co-leader of EisnerAmper’s national real estate practice.

“In terms of mall loans, more loans are seeing values drop by at least 50% since the loans were originated,” Knee said, in a phone interview. “The problem is these loans are most likely going to be liquidated.”

In a few more extreme examples, several properties were valued 90% below their last financing, according to CRED iQ.

Destiny USA’s value was last pegged at $203 million, down from $710 million seven years ago for the upstate New York State property, which sits about 175 miles east of Niagara Falls. The borrower still owes $430 million in senior mortgage debt.

Several requests for comment to developer and borrower Pyramid Management Group, which owns Destiny USA, weren’t returned.

Two Sides of Coin

Like hotels, office buildings and other commercial property types, many loans on malls end up packaged and sold to investors as bonds in the roughly $600 billion commercial mortgage-backed securities (CMBS) market.

Several of the nation’s biggest mall owners set up as public real-estate investment trusts, including Simon Property Group
and have been handing back the keys to lenders on weaker malls during the pandemic, but also restructuring or refinancing their corporate debt.

See: Brookfield to hand back keys to three malls, potentially more, as it goes private in $6.5 billion deal

“We have a really strong view that COVID-19 was a pull forward of the rationalization of retail that was long overdue,” said Richard Hill, head of U.S. REIT equity and commercial real estate debt research.

“If you agree with that, there’s a scenario whereby REITs are in a better off position, net-net than 24 months ago,” in part, because they shed some of their lower quality malls, Hill told MarketWatch.

Increased mall foot traffic heading into the fall and improved balance sheets also are reasons why the stock price of several REITs have rallied this year, even if they still lag over a two-year time frame.

See: Supply-chain concerns causing shoppers to stockpile gifts just in case, data shows

Shares of mall giant Simon were up almost 70% Wednesday on the year, versus a near 75% jump for Macerich Co.’s

stock. During the same stretch, the S&P 500 index

advanced almost 21%, while the Dow Jones Industrial Average

rose 16.4%, according to FactSet.

“A lot of Class A malls are still doing great,” Knee said, adding that it’s the B and C categories feeling the worst downward pressure.

“We are listening to what investors are looking for in terms of returns, and what their risk profile is,” she said. “Malls are still high risk investments, but buyers want high returns.”

Even so, Hill’s team a year ago predicted the pandemic could spell the end of 30-35% of U.S. malls, and still sticks to that estimate. The initial range was based on CoStar Group’s then 1,167 tally of existing U.S. malls, which has since slightly dropped to 1,161. 

Read: Meet the Long Island guys who love unloved shopping malls

This post was originally published on Market Watch

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