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The retail apocalypse proportions are getting so extensive that its downfall has been putting the commercial real state sector in big trouble. Experts have been warning that the $15 trillion market is at risk of bleeding over into the broader financial system as the U.S. struggles to come out of a deep economic collapse. The number of retail store closings has hit records this year and it’s on pace to surpass the staggering bankruptcy figures seen during the Great Recession.
As the empty retail space has been continuously growing, economists alert the commercial real state business is on the verge to spark the next economic crisis. Today, we are going to examine the most recent assessments that have been pointing out to a very chaotic future both in retail and the real state industry. So stay with us, please leave a thumbs up in this video, share it with friends, and subscribe to our channel to keep updated with the next unfoldings of the 21st-Century Depression.
In the first six months of 2020, retail store closings have reached record levels, registering overwhelming rates of bankruptcy and liquidation filings as the health crisis sped up the downward trend the industry has been facing for years now. According to a recent report on the downturn’s severity, the shift to online shopping and the significant reduction in consumer spending has put American retail in a more dangerous place than the one witnessed in the wake of the 2007-09 recession, when 48 retailers filed for bankruptcy.
The professional-services firm BDO USA LLP indicated in a recent analysis that this year’s collapse could overtake that of 2010. Back then, the sector had the opportunity to restructure itself and fight back the deterioration suffered during the economic meltdown. At the present time, with online shopping reshaping consumer tendencies and an aggravating economic state, retail stores may have found a dead-end.
Together, hotels and retail, which have been hit the hardest, account for 40 percent of the commercial mortgage-backed securities market. Although lockdowns were lifted months ago, 1 out of every 2 hotel rooms remains vacant. Urban hotels have some of the highest operating costs and have been handling the worst occupancy rates, marking less than 38 percent. On the other hand, retail has undoubtedly faced the sharpest decline. And the downfall is not only configured by small strip malls: the owner of the $1.9 billion Mall of America reached an agreement with its special servicer in August to prevent foreclosure.
Today, one-quarter of all CMBS hotel loans are in special servicing compared with 1.9 percent last year. Retail loans in special servicing are at 18.3 percent, a 5 percent increase from the end of 2019. Another aggravating factor is that there haven’t been enough commercial property transactions to measure how deep property values have actually fallen, leading buyers and sellers to have extremely differing views of what a property is worth.
The lack of clarity in this matter affects how loans are diced up and packaged into securities held by investors. A bank could provide a borrower short-term relief and revaluate the issue in a few months, while a borrower whose loan has been bundled into a security has to pass through a more elaborate process to gather various investors’ approvals to adjust payments. Special servicers have to shape future payments for the bondholders, which has become a difficult mission since it hasn’t been possible to fully assess what a building is worth or whether it will bring any revenue soon.
The American Hotel and Lodging Association released a survey showing that “15 percent of borrowers whose loans had been packaged and sold to investors had received relief on their loans, compared with 80 percent of borrowers with bank-owned loans”. At the end of the day, the source of funding doesn’t make much difference – ultimately, a bank will have to write down a property that doesn’t recover. And industry experts aren’t sure which properties will.
For now, what we know is that retailers are about to close 25,000 stores across the country. This means property owners will get even more distressed with the massive amount of rental insolvency. As we approach the holiday season, many retailers are counting on the revenue to pay their debts. But as Mr. Graised signaled, many of those won’t hit their expected goals and will be unable to pay back the rental deferrals landlords agreed to issue. And that will create an debt immense bubble in the retail sector, possibly flagging the end of the industry as we know, The bubble will also comprise the commercial real state market, and the result of its burst may spark an unprecedented financial crisis, so there’s no rest in sight for the fragile American economy.
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