Circuit City as canary in the coalmine for commercial real estate

Recently, I was discussing the economy with a lawyer expert in both commercial real estate (CRE) and taxation, workouts, and bankruptcy.  He made a few statements that I felt relevant enough to pass on here.

First, he said that the anchor stores in shopping centers always get sweetheart deals. It is the smaller stores that pay full price.  He also said that he was involved in tens of billions of dollars in CRE deals in the last few years that he can look back on as being highly questionable in this economy.  He expects to see many of these deals again in bankruptcy.  However, the most worrying statement he made had to do with securitization.  He said that the workouts (process of negotiation to avoid bankruptcy) in which he had been involved where assets were securitized were never successful.  In his experience, if the assets were securitized, workout was impossible and bankruptcy was the only option.

With that in mind, I want you to read this snippet from a Reuters story:

The collapse of electronics retailer Circuit City could drive down shopping and strip mall rents, and deal another blow to commercial mortgage-backed securities’ (CMBS) investors who have already seen their bond prices slide.

After a dismal holiday shopping season and several failed attempts to sell itself, Circuit City — having filed for Chapter 11 bankruptcy protection in November — last week said it would close all its 567 U.S. stores and liquidate its assets.

The move left 30,000 employees of the Woodland Hills, California-based company without work, and creditors — including landlords — lining up to get whatever they can after the company sells its inventory.

“Now those landlords are in line like the rest of their creditors — and probably in the back of the line to get paid,” said Suzanne Mulvee, Property & Portfolio Research real estate strategist.

The loss of the large tenant, whose stores typically run from 35,000 to 40,000 square feet, is likely to be felt by some publicly traded shopping center owners, such as Developers Diversified Realty Corp DDR.N, where Circuit City accounted for 1.7 percent of its annual base rent revenue, and Kimco Realty Corp KIM.N, where the chain accounted for 1.5 percent of its annual base revenue, according to Green Street Advisors analyst Nick Vetter.

Not that Circuit City is always an anchor, but this has to be a negative for CRE defaults and asset-backed bonds.  It robs many shopping centers of anchor stores, putting the squeeze on smaller vendors (who must now pay even more to make up for the loss), even while they are left adrift because of the loss of the anchor.  Commercial property is to 2009 what subprime was to 2007 and 2008.

Source
Circuit City collapse could hit real estate investors – Reuters