Retail Woes To Ripple Through CMBS

by REIT Wrecks on July 29, 2008

One Less CRE Lilly Pad In The Real Estate Swamp

The Wall Street Journal is reporting that lawyers for Mervyn’s LLC are telling creditors that the regional department-store chain will file for bankruptcy protection in the next few days, barring a last-minute cash infusion.

Mervyn’s, which operates 177 stores, mostly in California, has been struggling in the face of sharp sales declines this year in California and Arizona, where the real-estate markets have collapsed.

In addition, long-time, national restaurant chains Bennigan’s and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 sites and letting go of thousand of employees.

It is one of the country’s largest restaurant bankruptcies. The chains will liquidate and are not likely to re-open.

I am not a lawyer but I live in San Francisco and like to play dress up every now and then and federal bankruptcy laws are complex, but in general default remedies for owner/lessors of commercial real estate are not incredibly favorable for creditors. Under the law, lessees have 60 days to affirm or reject their leases. For those leases that are rejected, the properties get thrown back on the market and the owner gets an unsecured claim get in line, buddy limited to three year’s worth of rent.

Meanwhile, the owner is forced to look for a new lease, with a property that is likely not incredibly well-located (why else would the lessee have rejected the lease in the first place) in an economy that is clearly tanking and therefore not well disposed toward retailers. This obviously makes it tough to pay your friendly banker on the first of every month.

It’s not unexpected, and ratings agencies have already noted an up-tick in retail related vacancy rates and CMBS delinquencies, but it’s a not a good situation, and it’s not getting any better. It’s also another reminder, for those of you that may have forgotten, that those 20%-plus yields you can pick up on a Mortgage REIT these days exist for only one reason: Risk

Retail REITs
Disclosure: More frightened than before

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