By Natalie Hughes
After months of suffering brick and mortar sales, retailers have taken a massive blow in terms of revenue despite the growing popularity of online shopping. Just like apartment dwellers and their landlords in New York City during this trying time, when retailers begin to suffer, so do the owners of their store spaces. As of this past weekend, two owners of a combined 130 malls and 87 million square feet of real estate across the United States have followed their tenants into financial distress, filing for Chapter 11 bankruptcy. Pennsylvania Real Estate Investment Trust and CBL & Associates Properties Inc. are now seeking protection from creditors as a result of pandemic induced pressure on their tenants, and in turn, on themselves. However, the real estate giants will continue to operate as they maneuver the process of restructuring.
During the early months of the pandemic, most landlords and property owners remained very lenient in their allowance of rent deferrals and defaults. They figured that cash flow would return once society stabilized, yet seven months later we remain in a position no better, while the pandemic has rather accelerated store closures. As a result, owners and landlords have been left no choice but to begin cracking down on payments as their retail property valuations continue to plummet.
CBL Properties stated in its official filing that the firm has registered assets and estimated liabilities of between $1 billion and $10 billion. Since August, uncollected rents from retail tenants, declining foot traffic from customers, and rapidly mounting debt have been taking a toll on the company’s profitability. For PREIT, on the other hand, executives noted that the bankruptcy filing was purely voluntary as the company would receive a prepackaged financial plan to "recapitalize the business and extend the company's debt maturity schedule". PREIT is optimistic as it has strong support from its lenders and plans to quickly emerge from the process in a superior position.
Unlike renowned industry leaders like Simon Property Group and Macerich Co., CBL Properties and PREIT are considered to own B-class malls. These are “less productive” malls than the leading rivals that bring in fewer sales per square foot. Further, B-class malls are often located outside of major metropolitan areas and upscale regions, making them extremely vulnerable to middle-class customers who are struggling to overcome financial burdens during times of distress like the pandemic. The pullback of anchor department stores like J.C. Penny, Sears, and Lord & Taylor did not aid the situation, either. B-class malls have fewer luxury boutiques and chains to bring in substantial revenue, increasing their reliance on that of run-of-the-mill department stores. Although filing for Chapter 11 bankruptcy is undoubtedly a step in the right direction towards recovery, the real estate giants still have a ways to go before returning to business as usual.