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"Retail Apocalypse" Carries Echoes of Housing Crisis

April 19, 2017, 08:00 AM
Filed Under: Bankruptcy

ABL Advisor Exclusive: Distress in the brick and mortar sector led to a surge in retail bankruptcies in the first three months of 2017, with retailers accounting for 48% more filings than the same period last year.

That’s according to a new report from, which finds commercial filings increased 4% this quarter compared to Q4 2016, and are up 25% compared to Q1 2015. 

By all accounts the retail sector has been driving the growth, with some of the largest brick and mortar stores seeking protection from creditors. In March alone, five retail giants filed petitions for Chapter 11, accounting for combined assets of more than $2 billion. Nearly 3,000 retail stores shut their doors in the first quarter of 2017 -- including giants like Payless ShoeSource, WetSeal, Aeropostale, hhgregg, RadioShack, Gander Mountain and BCBG Max Azria, according to a report from Credit Suisse Group AG analyst Christian Buss.

According to press reports, Pittsburgh-based fashion chain Rue21 could be steps away from becoming the next big retailer to go under. Over the weekend the company announced it was closing hundreds of stories, and has reportedly been missing payments on debt.

The retail sector is set to replace the energy sector as the most distressed sector this year, according to And analysists are warning that a “retail apocalypse” is upon us -- with echoes of the housing crisis in 2008 and 2009. Investment professionals trace the roots of the crisis to rising default rates among commercial mortgage-backed securities (CMBS).

By the end of 2017, $200 billion in CMBS is set to mature. More than a quarter of those loans are backed by retail properties, and delinquencies are on the rise.

According to Manus Clancy, an analyst with Trepp, the delinquency rate for U.S. commercial real estate loans in CMBS is now 5.37%, an increase of six basis points from February. The reading has consistently climbed over the past year as loans from 2006 and 2007 have reached their maturity dates and have not been paid off via refinancing, Clancy notes.

The retail sector is being hit especially hard by the stress, with delinquencies up 14 basis points in February to 5.21%.

"In plain English," writes Parth Panchal, at, "this means that stores in commercial malls are not making their mortgage payments at an increasing rate because of decreasing sales. With that, CMBS, which tracks these mortgages, will fail."

As large stores close up, malls lose rent and face increased pressure to pay lenders. About $48 billion in loans backed by mall properties are at risk of default, according to Morningstar.

“We are most concerned about class-B malls, particularly those in secondary and tertiary markets. When anchors close in these malls, it can be difficult to find tenants to backfill the space,” said Edward Dittmer, vice president of CMBS at Morningstar Credit Ratings, in an interview with National Real Estate Investor.

Meanwhile consumer trends, most notably the ascendency of online shopping platforms like, continue to pressure traditional big box retailers. Retail sales fell for a second straight month in March, according to the Commerce Department.  At the end of February, Moody’s reported that the number of U.S. retailers ranked at the most-distressed level of the credit-rating spectrum has more than tripled since the Great Recession of 2008-2009 and is heading toward record levels in the next five years. 

"This year will be the year of retail bankruptcies," Corali Lopez-Castro, a bankruptcy lawyer, told Business Insider in a recent interview. "Retailers are running out of cash, and the dominoes are starting to fall."

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