Mall owners with REITs are facing hard times after massive closures of retail stores.
Real estate owners are seeing a sharp rise in rent defaults among tenants in the midst of the pandemic.
CBL, an American REIT, recently declared a zero dividend, indicating a looming real estate market crisis.
The outbreak of the deadly corona virus has dealt a severe blow to the global economy. Among the most effective measures taken to contain the spread of the virus is social distancing, which is terrible news for owners of shopping centers with Real Estate Investment Trusts (REITs) in their portfolios.
Thanks to the tense economic situation, companies are already relocating to the Internet and closing down shopping mall sites. But even before the Covid 19 pandemic, shopping centers were already experiencing a dramatic shift to online shopping, and it only took a few weeks to drive the troubled companies out of business.
A majority of malls are built to bring the masses together at a central point, and considering how easily Covid-19 spreads in crowds, this makes these places unsafe today. Considering the fact that several retailers housed in the properties where mall REITs sell discretionary items such as jewelry and clothing, it is no wonder that the malls were among the first to close when the respective governments worldwide announced closures.
But then it wouldn’t be so bad if the tenants would continue to pay rent. Reports show, however, that most retailers are under serious financial pressure, with most opting to renegotiate rents or close completely. And of course, some have refused to pay the rent at all, and the logic is that if the malls are not operating, why should they waive the rent?
However, tenants have their fair share of bills to pay, including bank loans, salaries, maintenance and more. If they fail to pay these costs, things could get ugly pretty quickly.
Unfortunately, this is exactly what is happening right now.
While the most leveraged shopping centers are under the most pressure from creditors, it is only a matter of time before their highly equity-financed counterparts also go bankrupt due to ongoing financial distress.
In addition, even those shopping centers that are less desirable are on the winning side. For example, a shopping center operator like CBL (NYSE: CBL) with a relatively weak balance sheet was forced to pay a zero dividend even before the world was severely affected by the coronavirus pandemic. Sources alerted Bloomberg that the company has now hired a team of consultants for a possible restructuring.