Bankrupt Retailers Have Massive CMBS Exposure. Closures Could Send Values Tumbling

A string of high-profile bankruptcies accelerated store closures last year and are only expected to escalate further in the coming months. That has put debt servicers on high alert.

At least $8.7B of CMBS loans are backed by properties where bankrupt retailers have decided to terminate their leases over the past year, according to a Bisnow analysis of reports by KBRA Credit Profile, a division of KBRA Analytics. 

That number is a fraction of the true risk faced by landlords in an increasingly uncertain retail landscape. It only includes the closures of seven major retailers that are using the bankruptcy process to restructure or liquidate: Bargain Hunt, Joann, Franchise Group, Big Lots, 99 Cents Only, Rite Aid and Party City. All together, the retailers have stores in properties backing at least $17B in CMBS loans.

The sudden surge in mass closures, including some anchor tenants, has forced landlords to quickly fill space or work out an agreement with their lenders, an especially difficult situation for complexes that are packed with big-box spaces. After a recovery in retail property values since the pandemic, more closures could drive asset prices back down.

“The debt is going to be bought for pennies on the dollar, the assets are going to be devalued, which sucks for everybody,” said Lanné Bennett, a retail real estate broker and consultant in Los Angeles. “But we're going to be able to do the deals we need to do now to get these spaces filled to fix our cities.”

Retailers closed 7,325 stores in 2024, but that number is expected to reach 15,000 this year, surpassing the 10,000 stores that shuttered in 2020, according to a report by Coresight Research. That could put landlords in a treacherous position as openings have plateaued following a period of intense growth.

Many other retailers have not filed for bankruptcy but are consolidating their footprint in ways that could also make their landlords uncomfortable.

Macy’s, which has experimented with several new formats, including small-scale and off-price, is now cutting some of those concepts as part of 66 planned store closures in the first quarter of the year. A KCP report identified 10 properties tied to $684.4M in CMBS debt on that list of terminations. 

Forever 21 is closing 200 stores, with reports of the company moving towards an online-first model amid rumors of bankruptcy and liquidation. KCP found 153 properties, collateralizing $27.4B in CMBS loans, house a location in one of Forever 21’s greater 373-store portfolio.

Swift lease exits can especially be an issue if a tenant had occupied a significant portion of the complex or other businesses are tied to the retailer as an anchor tenant, allowing stores to decrease their rent or also exit their lease. Macy’s 66 closures alone are expected to empty 12M SF of mall anchor space nationally, according to a fourth-quarter report by JLL. Such closures could put those properties onto a CMBS watchlist as servicers anticipate defaults.

“There's a ripple effect,” Whitestone REIT President and Chief Operating Officer Christine Mastandrea said. “Of course, that does get looked at by the underwriters of the CMBS market.”

Retail landlords have had the delight of record low vacancies as consumers emerged from Covid-19 lockdown. The Q4 vacancy rate was just 4.1% nationwide, according to JLL. But that is expected to rise in 2025.

Last year, store closures outpaced openings with a net loss of 1,355 stores, according to Coresight. JLL calculates nearly 140M SF will return to the market, with roughly 4,300 announced closures of spaces larger than 10K SF.

Brokers and owners said it has been relatively easy to backfill space as long as the real estate is right. In Q4, net absorption rose nearly 70% quarter-over-quarter to 6.8M SF, according to JLL.

Bennett, an executive vice president with Urbanlime Real Estate, said she has been summoned as a fixer when space is emptied out. She primarily represents experiential tenants, which means activating spaces with anything from pop-up markets to sports facilities.

“The banks are trying to work it out as much as they can, but it always gets to that breaking point. I get that call. It's going to servicing,” Bennett said. “They're just like, ‘Submit the best deal you can. Maybe we'll see if we get the bank to approve it.’”

When Bed Bath and Beyond closed all of its physical locations in 2023 as part of its bankruptcy, it axed its lease in a Whitestone shopping center. Mastandrea said that space was then leased to a pickleball tenant, which takes up 25K SF. 

But it’s also important for landlords to physically future-proof their portfolio, especially larger power centers that have several big-box anchor tenants, Mastandrea said. That includes cutting down those large boxes, which can be expensive.

“It's been a big shift in cap rates for those centers,” Mastandrea said. “But I haven't seen the keys go back.”

Better-capitalized investors have been on the hunt, and many properties are getting scooped up before banks begin the foreclosure process. In the second half of 2024, transaction volume reached $21.2B, a 36% increase from the first half of the year, per JLL.

Those new owners are better able to reposition the asset so bankruptcies don’t have as much of an impact.

LRG Investors partner and Walgreens’ former Head of Real Estate, Joe Brady, is one of those buyers. He said he’s eyeing a center in Florida that went dark after Big Lots’ bankruptcy. 

“My sense is the owner doesn't have the capital to do what he needs to do,” Brady said. “I have investors behind me that would love to buy that, put in a Sprouts, retenant it and uplift it.” 

“It's creative destruction,” he said.