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Thousands Of Retailers Damaged By Covid-19 Are Filing Bankruptcy To Break Leases

Thousands Of Retailers Damaged By Covid-19 Are Filing Bankruptcy To Break Leases

bankruptcy
Thousands of covid-hit stores are filing bankruptcy to break leases. Up to 25,000 are expected to close in the U.S. in 2020. Photo: Businesses are shuttered during the coronavirus epidemic in the Crown Heights neighborhood of Brooklyn in New York., April 30, 2020. (AP Photo/Mark Lennihan, File)

Up to 25,000 stores are expected to close in the U.S. in 2020 including more than half of mall department stores, and they’re using Chapter 11 bankruptcy filings to break their leases.

Along with department stores, fashion boutiques are among the most vulnerable.

By seeking court protection, companies avoid drawn-out negotiations with landlords but it threatens the real estate market and the half-trillion-dollar market for commercial mortgage-backed securities, Bloomberg reported.

Mortgage-backed securities are an echo from the sub-prime mortgage crisis that started in 2007. The housing bubble that preceded the Great Recession was financed with mortgage-backed securities.

An investment similar to a bond, a mortgage-backed security is made up of a bundle of loans bought from the banks that issued them. Investors in mortgage-backed securities receive periodic payments similar to bond coupon payments. The mortgage-backed security is a type of asset-backed security.

“Commercial mortgage-backed securities tend to be more complex and volatile than residential mortgage-backed securities due to the unique nature of the underlying property assets,” according to Investopedia.

The New York Federal Reserve estimates that 41 percent of Black-owned businesses across the country shut down between February and April. By comparison, 17 percent of white businesses shut down during the same period, according to a Fed study unveiled last week on the pandemic’s impact on business owners nationwide, CNN reported.

The U.S. has 3,000 counties, and 40 percent of Black-owned businesses are concentrated in 30 of them — about 1 percent of all U.S. counties. Black businesses tend to be concentrated in metro areas with larger Black populations.

Black-owned business are more often in service industries such as retail and restaurants that have been hit hardest by the outbreak, Bank And Trade reported.

“If this becomes a tsunami of retailers rejecting their leases, it’s going to trigger another part of the sea change — the mortgages held by the landlords,” said Melanie Cyganowski, a partner at law firm Otterbourg PC and former bankruptcy judge.

Landlords, in turn, have their own mortgages to worry about, which were also underwritten with pre-pandemic assumptions about rent collections, Bloomberg reported.

Sixteen percent of retail property loans bundled into commercial mortgage-backed securities were delinquent in July, compared to 3.8 percent in January, according to research firm Trepp.

“Bankruptcy flips the power from landlords to tenants,” Bloomberg reported.  

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More than half of mall department stores could close forever by the end of 2021, according to an April report from real estate research firm Green Street Advisors. J.C. Penney says it’s closing more than 150 locations. Neiman Marcus plans to pull out of New York’s Hudson Yards development and other U.S. locations. U.S. retailers J. Crew Group Inc. and the owner of Ann Taylor are filing Chapter 11.

CBL & Associates Properties Inc., which owns more than 100 U.S. shopping centers, is preparing its own bankruptcy filing after rent collections evaporated.

So far, the closures are “just the tip of the iceberg,” said Garrick Brown, head of Americas retail research for Cushman & Wakefield. Over the next two years, at least 1.2 billion of square feet — 10 percent of occupied store real estate — will go vacant, he said, according to Bloomberg. “Worst-case scenario, that could double.”

Read more: Biggest Mall In The U.S. Is 2 Months Delinquent On $1.4 Billion Loan