Commercial Real Estate Collapse Triggering 45% Drop In Property Value As Business Face Foreclosure

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While the entire country is on a countdown to the end of the health crisis, the retail industry should brace itself because a huge wave of closures is coming. Analysts from stockbroking firm UBS are warning that “at least tens of thousands” of store closures will occur as a result of the permanent shift in consumer behavior and the rise of e-commerce, whereas a new study conducted by Morgan Stanley experts found that 1 out of 3 shopping malls will soon disappear from the U.S. economic landscape. The decay of struggling U.S. malls has been years in the making. Industry analysts have been speculating for years what would be the ultimate catalyst to trigger malls’ undoing – and after the sanitary outbreak hit, they had their answer. It seems like hundreds of commercial properties have reached the point of no return across the U.S., and that’s mainly attributed to the fact that the strict social distancing restrictions forced consumers to learn to buy the things they like, want, and need using online platforms. In face of endless possibilities and increased convenience offered by the virtual experience, it’s very unlikely customers ever resume their previous spending patterns in physical stores.
Already, 18 major retailers filed for bankruptcy, mostly concentrated in apparel and footwear, home furnishings, grocery, and department stores, according to Green Street reports. Some of these businesses spent over 100 years building their brands into household names, but in 10 short years, a retail apocalypse swept across the industry and left stores empty while malls started to lose relevance. The decay of the sector, like so much in the last decade, can be traced back to the last financial crisis. After the housing bubble burst, several retailers struggled to make it through the Great Recession. Hundreds of thousands of employees were laid off and private equity firms intervened, but in that process, they burdened mall brands with massive amounts of debt. Even companies that managed to stay afloat during the current recession, have been announcing mass store closures hoping to curb their expenses.
Consequently, such closures are having a huge impact on mall occupancy rates and recent numbers are already showing it. In the first quarter of 2021, regional malls in the United States registered the highest vacancy rate in history at 11.4%. The outlook for the sector remains bleak as many more closures are expected. In a report released in April, UBS predicted that in the best-case scenario roughly 80,000 retail stores would close all across the nation in the next few years, affecting nearly 9% of all retail stores, which means one in eleven stores in the United States is on the verge of disappearing forever. In the worst-case scenario is that twice that number of stores could be shut down, accounting for as many as 150,000 closures.
In face of this gloomy forecast, and considering it would be incredibly difficult to fill in all that vacant retail space during one of the worst economic recessions this country has ever experienced, according to a team of Morgan Stanley analysts, 30 to 35 percent of U.S. malls are likely to close for good over the next few months. In other words, 1 out of 3 shopping malls may go extinct even before the economy reopens. Until two years ago, Green Street Advisors still expected them to disappear by 2030, but after last year’s events, that forecast got remarkably adjusted: now they anticipate the malls will fade out before the end of this year.
Investors are now having to assess if the best move is to reoccupy the vacant space or cut out the distressed property from their portfolios entirely. Remaining a viable option for investment in a market that is becoming increasingly distressed will certainly not be easy. Already, some of these property owners have taken some desperate measures to keep doors open. As a sign of the times, while vaccines roll out across the country, thousands of people are getting vaccinated in abandoned Kmarts, Sears, and Toys R Us, instead of CVS pharmacies or local health clinics.
For mall owners that have seen store vacancy rates skyrocket over the past twelve months, the symbolism of having deserted stores transformed into mass vaccination clinics underscores how rapidly our economy has changed after the health crisis began, and how the retail apocalypse is turning our once-thriving economic landscape in a dystopian scenario. And even though the end of the outbreak might be in sight as the distribution of the vaccine ramps up, for decaying malls, it seems that this “new normal” means that the new dystopian reality is here to stay.

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Epic Economist

Epic Economist

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