During the 2002 recession, which coincided with Kmart's bankruptcy filing, the average retail vacancy rate was 12%. PPR reported a year-end (YE) 2008 rate of 15% and predicts the rate will reach 17.8% by YE 2009. The International Council of Shopping Centers (ICSC) predicts that 73,000 stores will close during the first half-2009.
"Increased vacancies in the retail sector will lead to longer resolution times as it will take longer to re-tenant space which will ultimately result in higher losses." said Managing Director Mary MacNeill.
Fitch expects losses on retail loans may increase as much as 34% to 60% from the five-year cumulative average of 44% for current defaults. Special servicers will foreclose on properties, as borrowers become unable to fund operating shortfalls due to the loss of tenants.
During its reorganization, Kmart rejected leases on over 600 stores. CMBS loans secured by Kmart properties, which took a loss, incurred an average loss of 52%. Losses ranged from a low of 16% to a maximum of 86% with the highest losses on single tenant properties in tertiary markets. Fitch believes vacant retail spaces in the current economic environment, will incur even higher loss severities.
Working against CMBS this time around is that the U.S. economy is contracting faster and further than in the 2002 recession. Gross Domestic Product still grew 1.6% in 2002 while in the last quarter of 2008, GDP contracted at an annualized rate of 6.2%, the deepest slide in twenty years. Unemployment has increased 42% from 2002 to 8.1% as of February 2009, with increases expected to continue. Consumer spending has declined 4.3% as of year-end 2008, while in 2002 and 2003 it remained positive.
Special servicers may need to explore several different options to maximize recoveries. Single tenant spaces can be marketed to non-traditional entertainment tenants. Conversely, they can be subdivided in order to attract smaller tenants. Large vacant mall locations, such as those left vacant by Steve & Barry's or Macys, typically find more interest by subdividing the space or even selling the space back to the mall operator for redevelopment.
Retail delinquencies account for $1.7 billion of the $6.2 billion total delinquencies in the Fitch Loan Delinquency Index. The Loan Delinquency Index across all property types is 1.28%; with 1.17% of all retail loans within the index currently delinquent. Fitch expects defaults in the retail sector to contribute a greater percentage of the index into 2010.
