Are “B” malls really in trouble? In its most recent “loans of concern” report, Fitch Ratings said three-fourths of the rated commercial mortgage-backed securities, or CMBS, that are classified as 2.0 have a negative rating outlook and are “tied to retail concerns.”

“Fitch has designated 55 CMBS 2.0 loans totaling $3.7 billion secured by underperforming regional mall and outlet properties as loans of concern through the end of last month,” the firm said. Senior director Melissa Che noted that traditional regional malls “will continue to evolve due to increasing store closures from retailer bankruptcies, changing consumer habits and the growing share of e-commerce.

In some of the loans identified, the regional malls with loans of concern are being impacted by robust retail activity in downtown and uptown areas of cities.

A spokesperson for the ratings firm said that as part of the analysis of loans, the company classified the loans of concern into several categories. The largest category is 30 loans with an average amount of $40 million, which are loans that are the “most susceptible of default.”

Fitch said the loans of concern “are interspersed throughout several states, though Fitch’s analysis did show a concentration of loans tied to nine class B malls in upstate New York.” Of those, five in the category are of the most susceptible to default.

The ratings company said loans of concern are classified that when for several reasons such as declining sales and a “lack of updated sales reporting.” Falling occupancy rates as well as a loss of “non-collateral or collateral anchor tenants” can also be a red flag. Other factors include cotenancy clause violations, increasing and significant market competition, debt service issues and poor tenant mix, among other issues.

For example, the Cottonwood Mall in Albuquerque, N.M. made the list because of “superior competition” and the non-collateral loss of the Macy’s closure.

“The property suffers from superior competition in the uptown area of Albuquerque, a business and shopping district located approximately 13 miles southeast of the subject,” the analysts said in their report. “The subject’s primary competitor is Coronado Center, a 1.1-million-square-foot regional mall owned by GGP anchored by Macy’s, Sears, J.C. Penney and Kohl’s. Another competitor is ABQ Uptown, a 230,000-square-foot lifestyle center that is owned by Simon Property Group LP and anchored by Trader Joe’s, Anthropologie and Pottery Barn.”

Fitch also said the uptown area has the only Apple store in the state, “and includes a variety of fast-casual and full-service restaurants, such as Bravo, Cucina Italiano, The Melting Pot, Elephant Bar and California Pizza Kitchen.”

The analysts also cited the closure of Macy’s and a declining total mall occupancy rate that fell to 78.9 percent as of December of 2017 versus a 95.4 percent rate in March of that same year.

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