Is CMBS The Next “Shoe To Drop”? GGP Sales Suggest Commercial Real Estate Crashing

Apparently people are growing less and less “eager” to shop in America’s dilapidated malls of the 80’s. Stunning Soviet-era architecture just doesn’t draw the crowds it used to. The mall, once a hot spot for American youth, has aged (and not so gracefully we might add) due to the consequences of a decade of extreme under-investment as REIT investors sacrificed long-term success for current yields. Add to that the fact that Amazon (AMZN) is eager to sell almost everything you could possibly want at a loss and ship it to your door within 27 minutes, it’s not surprising that mall traffic is suffering. 

The problem, of course, is that none of this curbed investor appetite for CMBS securities or commercial real estate REITs as investors have spent the past 7 years reaching for yield in a low-interest rate environment. What better place to park capital than a “safe,” commercial real estate REIT with high income visibility from long-term lease agreements? Sounds like a great idea as long as you can ignore the pesky little fact that REIT dividends have predominantly been funded with cash saved from under-investment in repairs and remodels making those distributions effectively a return “of” capital rather than a return “on” capital…details…as long as you can sell to someone else before then music ends then you’ll be just fine.

Unfortunately for those investors, recent signs seem to indicate that the music is, in fact, ending. This is a topic we’ve discussed in the past (see recent post entitled “Time To Take The Fed’s Warning Seriously: CMBS Has “Greatest Ever Monthly Delinquency Increase”) as signs are starting to emerge that delinquency rates for CMBS structures are on the rise while valuations of underlying properties are on the decline.  

Our most recent example of deterioration comes from data disclosed by GGP in its 2Q earnings call. According to a research note published by Richard Hill at Morgan Stanley, GGP announced the sale of the Newgate Mall in Ogden, UT and the Rogue Valley Mall in in Medford, OR for 16% and 25% less than their appraised value in 2012. They look like beautiful establishments, no Soviet-era architecture here folks.