Two major commercial real estate owners, which own a combined 133 malls across the country, have gone bankrupt amid a sharp decline in foot traffic and challenges with tenants paying rent.
Over the past couple days, CBL & Associates Properties Inc. and Pennsylvania Real Estate Investment Trust filed for Chapter 11 protection in an effort to reposition their balance sheets and improve their portfolios following months of financial damage caused by the persistent global pandemic.
On Sunday, PREIT, which holds stakes in 26 shopping centers mostly located in the mid-Atlantic region, sought approval for a restructuring plan that involved $150 million in new borrowings. During proceedings, it intends to continue paying all vendors, suppliers and employees.
A day later, CBL announced it would reorganize its company, with plans to erase about $900 million in debt and at least $600 million in other financial obligations. Like PREIT, the mall giant — which owns 107 properties, primarily in the Southeast and the Midwest — will maintain all day-to-day operations.
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In recent years, malls have contended with waning visitor numbers and increasing vacancies in tandem with the surge in e-commerce and skyrocketing commercial rents. However, as the coronavirus outbreak took hold in the United States, those pressures have escalated for landlords as some retailers that sought to maintain their cash flow skipped out on rent payments. Some of malls’ biggest tenants — like JCPenney, Neiman Marcus and J.Crew — also sought bankruptcy protection, while other boldface chains (such as H&M, Guess and Chico’s) announced thousands of permanent store closures.
According to a Coresight Research study released last month, about a quarter of U.S. malls are at risk of shuttering over the next three to five years, considering the COVID-19 health crisis. It added that the rise of department store shutdowns could compel other retail chains in those shopping centers to invoke their co-tenancy clauses, which could allow them to pay lower rent or terminate their leases altogether.
Meanwhile, filling anchor-sized holes — like those left by JCPenney and Neiman Marcus, both of which are shuttering a significant number of doors — isn’t an easy feat. In the past, some commercial real estate owners have found tenants in a variety of businesses, from gyms like Planet Fitness and groceries including Whole Foods to home goods behemoth IKEA — all of which can take up large units. Ultimately, the pandemic could accelerate the modernization of malls, which have increasingly centered on entertainment, pop-ups and other experiential concepts.