Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/818922
48 • May 2017 • Western Real Estate Business www.REBusinessOnline.com X Marks the Spot: Retail Exposure in CMBX Earlier this year, the CMBX market was put in the spotlight after Bloom- berg reported that analysts at Deutsche Bank and Morgan Stanley saw an op- portunity in betting against portions of CMBX 6 and 7. CMBX comprises a series of indices referencing 25 fixed- rate CMBS that are used by traders to gauge the creditworthiness of the cur- rent securitized mortgage market. The two CMBX series, each derived by a group of conduit transactions from the 2012 to 2013 vintages, are thought to bear greater exposure to struggling U.S. malls and shopping centers than the more recent 8 to 10 indexes. Bank- ruptcies and closures by large depart- ment anchors may cause other tenants at malls with lower traffic to leave, which in turn would trigger extensive retail defaults in the underlying secu- rities. The recommendation has been to buy default protection on BBB- paper, bonds that are a step above junk. Based on Trepp's internal database, just over $9.6 billion in CMBS loans across 47 deals are tied to shopping malls behind the CMBX 6 and 7 series. These loans appear to carry a benign profile — the notes have a weighted average loan-to- value rate (LTV) of 61.29 percent and debt service coverage ratio (DSCR) of 2.20x, while weighted average occu- pancy stands at 94.07 percent. All of the loans remain current on payments while a small subset of them (5.35 per- cent of the balance) are on the servicer watchlist. Perceived risk in these series have caused a recent blowout in sub- ordinate, BB and BBB- spreads at the bottom of the credit stack. The sell-off has spilled over to sub credit spreads in the cash market and the more recent CMBX counterparts that feature more conservative underwriting and less ex- posure to low-quality malls. Ultimate- ly, this raises concerns about whether the assets are becoming vastly under- valued. As current market mispricings return to more normal levels and retail participants work to stay relevant in the changing consumer environment, CMBX investors may be able to weath- er this so-called retail storm. The E-commerce Impact According to the U.S. Census Bu- reau, online retail sales only made up 8.3 percent of total sales volume in the fourth quarter of 2016 on a seasonally adjusted basis, which suggests that on- line retail is only one factor causing the decline in traditional brick-and-mortar establishments. The ability to see and test merchandise in person stands as the core component of the overall re- tail experience, and physical retail will continue to be in demand, albeit with slightly different concepts and leasing arrangements. Landlords and tenants are largely attuned to prevailing re- tail trends, while REITs have been re- purposing lower-producing Class B/C malls to include more integrated tech- nologies with greater drawing power. While many department chains will boast smaller footprints in the coming years or may leave the brick-and-mor- tar sector altogether, those that suc- cessfully adapt to the shift in the way retail spaces are modeled and utilized will be the ones that remain and thrive. In terms of the retail sector in the CMBS space, formidable obstacles stemming from new regulatory head- winds and election year uncertainty have already caused noticeable chang- es in the securitized lending realm. Coupled with stabilizing property val- ues and upcoming interest rate hikes, many borrowers will find it increas- ingly more difficult to secure new loans. On a positive note, the market has proven to be resilient and is hold- ing up very well in light of all these changes, and potential deregulatory policies favored by the new adminis- tration could provide some welcome relief to the industry. Catherine Liu is a research analyst with Trepp, which provides data, analytics, and technology solutions to the global securities and invest- ment management industries. California loans will be made pursuant to Finance Lenders License #603H310 from the DBO. WalkerDunlop.com POW ERING YOUR PROSPERIT Y RANDY RIEGER CHAIRM AN/FOUNDER HOUSING TRUS T G ROUP Avid Tennis Player Walker & Dunlop borrower since 2013