I read
yesterday on retailtrafficmag.com a provocative article: When the Landlord
Can’t Pay the Mortgage.
There are discussions
among economists about the “crowding out” phenomena. It occurs when the government
is required to issue so much debt that it crowds out the private sector. This
is happening all over the develop world where governments have stepped in to
avoid a more severe recession and now are not paying the price, they are financing
it. This can drive up interest rates to attract investors and make investors
scarce. It is more acutely experienced by the smaller private sector firms
that are not accustomed to periodically raising money. Landlords that need to refinance or create an investment vehicle for their properties are running into headwinds. The article is a set up
for a discussion by two very qualified professionals in the form of a podcast
from the retailer’s perspective. They present their set up eloquently.
In the face of the biggest financial crisis and deepest recession since the Great Depression, retail landlords are increasingly falling behind on mortgage payments or defaulting entirely. Owners are facing great difficulties refinancing debt. One major source of financing—commercial mortgage-backed securities—is no longer available. And the lenders that are still in the market have dramatically tightened underwriting standards.
This is happening at a time when other pressures are mounting. Vacancy rates are rising and retail sales are suffering. Faced with all these pressures, more and more properties will end up distressed. Commercial mortgage defaults are at a 17-year high and still rising. The current volume of distressed retail assets on the market at the end of April reached 1,276 properties valued at $30.6 billion, according to Real Capital Analytics—accounting for 38 percent of the total value of distressed assets.
My
perspective is that of an investor and sounds cold, but as I have written
before this country is over-stored, over-shopping centered and over-strip malled.
As with almost every other sector, in a crisis, businesses cut back
proportionately with revenue as fast as they can. Not every firm survives which
is unfortunate. As a crisis takes hold, the firms with reserves or the ability
to raise capital can hold out longer and have an advantage to retool. Many other
firms with good product and management but not the ability on their own to
raise capital merge and consolidate. The weaker players (from a business
perspective) go out of business. For retailers, the survival of each facet of
their supply chain influences its own ability to compete. Today, landlords are
facing pressures and challenges that perhaps they have never encountered due to
the continuing crisis. This presents a new challenge for retailers.
Those that
read me regularly already know I am bullish on the global economy. The
businesses that remain and have profits due to their competitors being in
crisis or being eliminated are the firms that will rebuild our system.
Eventually, and not without a lot of pain, we will have thriving retailers.
Consumers may save more over the next 10 years than the previous, but shop they
will and there will be good money to be made in the right aisle of retail.
Unfortunately
as an investor going into this challenging holiday season I remain long only major
retailers: Nordstrom Inc. (NYSE: JWN) on the higher end and Target (NYSE: TGT)
and Wal-Mart Stores Inc. (NYSE: WMT) on the every day. Each has a competitive
advantage with its real estate, and is showing a profit over the trailing 12
months.
Disclosure:
Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company.
Through various equity strategies under his supervision he is currently long
JWN, TGT and WMT.
Comments