Herb Weitzman: We Are At The Front End Of Retail Delinquencies
This downturn was much more abrupt — for the first time in Weitzman's 40-plus-year career, retail traffic fell off a cliff as Texas shoppers and restaurant guests spent an entire month in lockdown and the following two quarters social distancing.
Still, Weitzman predicts the worst pain is coming soon, following the traditional trajectory of a months-long delay before the worst impacts of a black swan event are felt.
We are now about seven months past the moment the coronavirus pandemic and associated health concerns forced retailers to close their doors and switch to digital, delivery and curbside pickup services. Weitzman told Bisnow he anticipates the next couple of months will see spikes in retail delinquencies.
"Banks were helpful in the first 90 days," he said. "We are past that now, and we are going to see potentially more vacancies in centers. And if a property was developed in the past 15 years and has a 65% or 70% mortgage on it, you are going to start seeing developers reaching into [their own] pockets to make mortgage payments because there's not going to be enough income."
It's at this point where the retail market is going to experience deeper struggles, Weitzman said, and the biggest test is right around the corner.
Some retailers will pass. Weitzman said some, particularly grocers and tech-focused tenants, should continue to thrive in spite of the downturn. Others have not succeeded in converting to digital and are suffering through a massive liquidity crunch.
"It's a mixed bag," Weitzman said. "Some are doing great. They picked up on the digitization of their retail businesses and they integrated it. There's been a convergence, and they've gotten good at it."
With so many retailers still dealing with declining monthly cash flow, bankruptcy and store closings (more than 10,000 stores closed in 2020 through mid-August, already setting a new annual record, according to BDO), Weitzman expects liquidity-starved tenants to push more shopping center mortgages into distress in the coming months.
The CMBS retail market is already showing signs of deep strain, with securitized retail loans difficult to modify in a crisis, Weitzman noted. The numbers support Weitzman's contention, with the retail CMBS delinquency rate hitting 18.07% in June, rising 788 basis points in just one month, Trepp Analytics reported.
When possible, landlords are trying to keep retailers in place to save their occupancy levels. A survey published by the National Retail Federation and PJ Solomon in late September found that retail rental payments were sparse over the summer but highlighted the ways landlords and tenants are working together to get through the pandemic. The report, which surveyed C-suite retail executives at firms with $100M-plus in sales and at least 10 locations, found less than a third paid at least 75% of June’s rent. More than 50% said they got rent concessions from their landlords.
Weitzman said his firm has negotiated about 1,300 amendments to retail leases since the outbreak of the crisis. In some renegotiations, the landlord agreed to delay tenant payments for a period of time.
Other tenants agreed to pay part of their payment plus triple-net, with the expectation they'll cover the difference when sales pick up over the holidays.
But the runway for retailers seeking government and landlord aid is running short, according to Weitzman. Stimulus money issued as part of the federal government's Payment Protection Program is running out and the longer tenants remain cash-constrained, the more difficult it is for them to survive long-term.
"There are some that just throw in the towel, and then you [have] the bankruptcies [and] you end up with the loss of occupancy," Weitzman said.
Weitzman is cautiously optimistic about the next few months, especially as deal flow has continued.
"We are surprisingly making a fair number of new deals, but it is spotty. It's a deal here, a deal there."
But he said plenty of market uncertainty remains with no vaccine approved as of October and retailers burning through their government loans. Even retail anchors that have credit lines to support their rental payments are showing signs of concern, with some of them still asking for rent relief to preserve cash, Weitzman said.
"That just signals they really don’t know how long this is going to last and how deep their pockets have to be, so it’s a really different game," he said.
CORRECTION OCT. 14, 2:00 P.M. CT: A previous version of this article misspelled the name of Weitzman. The story has been updated.