U.S. mall values plunged an average 60 per cent after appraisals in 2020, a sign of more pain to come for retail properties even as the economy emerges from pandemic-enforced lockdowns.

About US$4 billion in value was erased from 118 retail-anchored properties with commercial mortgage-backed securities debt after reappraisals triggered by payment delinquencies, defaults or foreclosures, according to data compiled by Bloomberg.

Those new valuations may underestimate losses when the properties come up for sale because so much retail real estate is in distress. And few buyers are willing to take risks on aging shopping centers as e-commerce continues to grab market share.

“It’s an eye-popping decline,” Gwen Roush, an analyst with DBRS Morningstar rating service who tracks commercial real estate, said in an interview. “When we’re forecasting a loss on these malls, we’re even further haircutting that value.”

The biggest owners, such as Simon Property Group Inc., Brookfield Asset Management Inc. and Starwood Capital Group, have started to triage properties, walking away from money-losers while reinvesting in viable locations.

Hard-hit centers were already decimated by department store bankruptcies and high vacancy rates, before COVID-19 accelerated Americans’ taste for online shopping. Vaccines and herd immunity are unlikely to lure visitors back to deserted gallerias perfumed with Cinnabon.

Quality Gap

Only about half of the 1,100 U.S. indoor malls have a good chance of survival, according to Floris van Dijkum, a real estate analyst with Compass Point Research & Trading. The strong will get stronger while the weakest face abandonment, he said.

“There’s a huge bifurcation between good and bad quality,” van Dijkum said. “By value, 80 per cent is in the top 300 malls.”

Simon, the country’s largest mall owner, is working with loan managers to restructure debt on underperforming centers or hand back the keys.

“Hope to make deals in some,” Chief Executive Officer David Simon said on the company’s latest earnings call. “If not, then they will no longer be part of our portfolio and we wish that new owner the best of luck.”

Outside Atlanta, Simon’s Town Center at Cobb, once appraised at US$322 million, received no bids at a courthouse foreclosure auction in February, according to a local news report. The company’s Montgomery Mall, near Philadelphia, was appraised at US$61 million last year, a 69 per cent drop from its 2014 value.

For the few malls that sold, prices were down just 1.8 per cent in January from a year earlier, data from Real Capital Analytics Inc. show. That’s because most of what traded was high-quality, according to Jim Costello, senior vice president at the research firm.

Awaiting Recovery

Some mall sellers are waiting for the economy to recover before unloading properties, hoping for higher prices.

Unibail-Rodamco-Westfield, owner of 37 U.S. shopping centers, said in its fourth-quarter earnings statement that it’s looking to 2022 to “significantly reduce our financial exposure to the U.S. when the investment market reopens.”

For many lower-end centers, the value is the land minus the cost of demolition, according to Costello.

“The orange tile and brown carpeting is just going to be torn down and plowed under and eventually trade at a price someone can build something else there,” he said.

Several mall operators have sought to escape their debt burdens while vacancies rise and tenants withhold rents. Washington Prime Group Inc. skipped a February interest payment and hired restructuring advisers. Pennsylvania Real Estate Investment Trust and CBL & Associates Properties Inc. filed for bankruptcy last year.

Debt management on about 17 per cent of retail properties with CMBS loans has been transferred to workout specialists because of delinquencies or other financial issues, second only to hospitality properties, with 24.5 per cent in special servicing, data from Trepp show.

Rating services have downgraded hundreds of bond tranches, many of them on mall debt, as concern rises that investors won’t get repaid, according to Roy Chun, senior managing director at Kroll Bond Rating Agency. It’s only a matter of time before the money stops flowing, he said.

“It’s the sixth or seventh inning of a game,” Chun said. “But you already know the winner and the loser.”