|Indoor Malls Continue to Suffer
In recent years many malls have replaced department stores with movie theaters, restaurants, gyms and other experiential offerings, which are now straining to comply with social distancing and increased sanitation, the report noted. Garden Fresh Restaurants, which owns 97 Souplantation and Sweet Tomatoes restaurants, filed Chapter 7, saying it could not adapt its buffet-style model to new restrictions.
The workout chain 24 Hour Fitness Worldwide, which has 440 clubs in 14 states, recently reopened some locations, but is struggling financially. S&P Global Ratings lowered its debt rating from ‘CCC+’ to ‘D’ on June 5. “Gym operators have put in place unbelievably stringent cleanliness and sanitizing processes,” Holmes said. “But they may permanently lose some customers who invested in home equipment during the shutdown.”
There are roughly 600 large enclosed malls around the country, and many in secondary and tertiary markets. “Some of those may get turned into Amazon distribution centers because they occupy the only big piece of land at the intersection of two major highways,” Holmes said.
Single-Tenant Net Lease Assets Shine
Single-tenant net lease assets continued to perform quite well in categories that remained open, and even those affected by shutdowns are holding their own due to strong balance sheets, the report noted. Lenders and investors are showing renewed interest in single-tenant net lease properties, which are typically in well-trafficked locations, and are highly flexible if a store goes out of business. Supermarkets, drug stores and drive through restaurants are all potential tenants.
Marcus & Millichap, which closed 2,000 single-tenant net lease deals in 2019, is seeing a surge in investor demand for triple net lease assets for investors involved in 1031 exchanges, since the Internal Revenue Service pushed the deadline for these deals to July 15.
On the lending side, banks and credit unions continue to finance retail deals on lease-in-place properties anchored by strong tenants, including supermarkets, drug stores, quick-service restaurants, bank branches and medical offices, such as dialysis clinics. We are seeing terms of 5, 7 and 10 years, LTVs averaging 65 percent, and coupon rates ranging from 325 to 450. Life companies are also in the market, but their credit box is much narrower. Indoor malls and mixed-use retail occupied by department stores, which are facing deficiencies in collections, are much more challenged. On the CMBS side, retail delinquencies rose 647 basis points to 10.14 percent, the biggest jump since 2009, according to Trepp.
Over the past 15 months, MMCC has helped clients close more than 940 loans on retail properties with more than 175 different lenders. With interest rates at historic lows, our ability to clear the market can help owners and investors position their portfolios appropriately in a volatile environment.