Not Quite Closing Time
There has been no shortage of negative headline news surrounding retail over the past few years. Major retailers have announced thousands of store closures and many have gone out of business. The rise of e-commerce has been a disruptor to brick and mortar retailers, with department stores and regional malls being the most negatively impacted. Consumers are shifting their shopping preferences while retailers struggle to adapt.
Retail properties are a core allocation in commercial mortgaged-backed securities (CMBS). This week’s chart depicts retail exposure in CMBS transactions over the last several years. When the securitization market re-opened after the financial crisis, the retail exposure was quite high, at 55%, in 2010. Since that time, the retail component has come down to an average of 21% in 2017. This is partly driven by investor pushback and their risk aversion to certain types of retail properties.
Over this time, however, the total delinquencies of retail properties in CMBS have been stable. While there have been many recent store closures and bankruptcies, the delinquency rate has been somewhat benign. Rent growth has remained positive and vacancy rates have remained steady.
Despite the pressures facing retail properties, vacancy rates remain manageable and the lack of new construction has been supportive of occupancy levels despite shifting demand. Retail properties are undergoing a transformation process to incorporate technology and offer more experiential options. While I expect the physical retail space to continue to shrink in the near term, the current allocation in CMBS transactions is less worrisome. A careful review of retail exposure and property subtype is important when identifying underlying risks. I seek well-diversified collateral with strong property characteristics in primary markets to mitigate risk.
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