Gordon Brothers’ Mark Dufton on Wednesday predicted the coronavirus crisis will have a lingering effect on retailers and shopping centers, causing collateral damage that could impact the wounded industries for up to two years after stores and malls reopen, which could be in mid-May, or later.

The chief executive officer for real estate for the advisory, restructuring and investment firm, Dufton said he sees 20,000 to 25,000 stores closing permanently as a result of COVID-19, during a call with Jeffries Equity Research analysts. A widely quoted estimate for shuttered stores has been 15,000.

“We’ll reach the bottom and hit a number that makes sense for the amount of retail space in this country,” Dufton said. “We’ll see another year or two of restructuring before we reach the bottom. It will be most department stores — they’ve been struggling for so long.”

Retailers struggling the most are in the middle market, such as J.C. Penney and Kohl’s. “If they have any availability on their lines of credit, retailers on the brink are trying to draw that down, and as quickly as possible.”

Citing Penney’s as one of the troubled retailers that may not survive the COVID-19 crisis, Dufton said, “A lot of people make it sound like [Penney’s] could be a debt restructuring. I don’t see it as an out-of-court restructuring. It’s too big to take place outside of the offices of the courts.”

Most retailers haven’t paid rent for March since centers weren’t open, nor have many paid for April, Dufton said. Others are addressing rent as a three-month issue, and in extreme cases, some retailers who didn’t pay April rent, are refusing to pay for May and June.

Behind the scenes, shopping centers are putting retailers into four buckets, instead of trying to deal with each individual tenant, with outcomes ranging from not offering any rent abatement to rent deferment or other concessions, depending on the retailer’s popularity and credit-worthiness.

“Landlords are dealing with tenants en masse. There’s a little horse trading going on, maybe in terms of non-monetary things like relaxing a co-tenancy,” Dufton said. “Landlords aren’t amenable to long-term leases or rent reductions. They’re super-sophisticated and make a very deep dive into retailers’ finances.”

Simon Property Group is the biggest shopping center REIT, and the most savvy, according to Dufton. “It’s not been easy with Simon,” he said of negotiations with the mall giant. “I’m not speaking out of school. They have a big portfolio to protect. They’ve been fair, and we’ve got deals done with them. Simon’s acquisition of Taubman Centers Inc., won’t change things dramatically, but it will give them more leverage in the marketplace.”. 

Apparel inventories are extremely worrisome, according to Dufton. “There’s lots of conversations about how we can disperse that stuff in the marketplace and what will the effect be on collateral value. It’s going to be a tough nut to crack, especially the longer [the crisis] goes on, because then it’s out of season and out of date.”

Retailers such as Gap Inc., have canceled merchandise orders until the fall, and backed-up inventories will impact any bankruptcy proceedings. “Retailers have all this inventory that’s not going to be worth as much as it was, which triggers lenders to make quicker decisions,” Dufton said.

The store closures are “just a slippery slope to the bottom,” Dufton said. “On the real estate side, there are no [tenants] to backfill the space. There will be a trickle-down effect if a mass of stores are closed in the bankruptcy process. 

This is a slow bleed for retail real restate. There’s still a reckoning to come, especially among the B  and C malls that have been struggling for a while,” Dufton said, adding that the coronavirus crisis hit hard because the cash flow was cut off so abruptly “and it was [already] a pretty tumultuous time in the retail world.”

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