Dive Brief:

• As the retail landscape changes due to the growth of e-commerce, the diminishing of department stores and the shrinking of many retailers’ physical footprints, commercial mortgage-backed securities (CMBS) loans backed by malls have suffered, according to a report from Morningstar Credit Ratings.

• Since 2010, liquidations amounting to $3.89 billion led to $2.88 billion in CMBS losses, a 74% loss severity, and another $3.81 billion (or 7.8% of the balance of loans backed by malls) are in special servicing, according to the report.

• In addition, some $2.82 billion in mall-backed CMBS loans are scheduled to mature through next year, according to Morningstar, and many don’t have the value to refinance that debt on the same terms.

Dive Insight:

Morningstar notes the rise of e-commerce and the lackluster performance of department stores, but also cites data from the International Council of Shopping Centers showing that the United States has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia, the next two highest — suggesting that more stores are likely to close, further decimating many malls.

While America currently has about 1,100 enclosed malls, Jan Kniffen, CEO of J. Rogers Kniffen Worldwide Enterprises, told CNBC earlier this year that number should realistically be around 700. “The top 250’ll do fine, and the rest of them are going to struggle,” he said. 

The situation is further complicated by new risk-retention rules under the Dodd-Frank Wall Street reform law, effective Dec. 24, which require the sponsor of asset-backed securities to retain a minimum 5% percent of fair value of all the securities and other asset-backed interests offered by the issuer. The new rules will make it more expensive for banks to sell CMBS debt. Loan brokers say packaged debt financing is now only available to the nation's best malls. Investors too are demanding greater prudence in CMBS underwriting.

Cumulative losses from 10-year CMBS loans issued before the Great Recession have already reached $32.6 billion, well over the average annual cumulative losses of roughly $1.23 billion in the decade before that, according to Wells Fargo data cited by Reuters.

“JC Penney, Sears and Macy’s have closed hundreds of unproductive stores, many in malls that were already troubled by store closings and declining sales,” according to Morningstar. “We are concerned as these anchors further consolidate amid oversupply. More than one third of all securitized mall loans have exposure to Macy’s, JC Penney and Sears, while another third is exposed to two of the three anchors.”