Retail is the second-largest property type funded through CMBS loans (multifamily is the first) and as of October regional malls throughout the country were backed by $48.6B in CMBS loans, according to a recent Morningstar report.

The state of today’s malls—caused by the prevalence of e-commerce, the need for a hybrid digital and physical experience and the shuttering of department stores—has caused a ripple effect on the CMBS market and those loans backed by retail property.

“Malls are a large part of CMBS," Morningstar and VP Edward Dittmer tells Bisnow. Edward says what makes these particular loans different from other property types is that it's hard to reverse the impact when a mall starts to head down that path towards becoming a dead mall and "when they become dead malls, the losses to CMBS are much greater."

Looking specifically at specially serviced mall loans—which are troubled or possibly problematic loans—Morningstar estimates there are 53 mall-backed loans that resulted in $1.88B in losses due to unpaid principal balances of $3.4B.

Many of the losses stemmed from Class-B and C malls that suffered from a lack of foot traffic or the shuttering of anchors, such as the JC Penney, Sears and Macy's closures, though other losses came from properties that were underwritten at the peak of the market and were found to have high debt and little amortization. Morningstar says specially serviced loans in the category for more than three years are likely to incur a 22% higher loss.

“A lot of malls are coming due, but the value isn’t there to refinance those loans,” Edward tells us. “Those loans are performing well on [the] surface and may even have 80% to 85% occupancy. The problem is once those get reappraised to get refinanced, the debt they were given in 2006 or 2007 was too much to handle.”