Tenant Risk: These Retailers Could Cause Your Bank Greater Retail Lending Defaults

Real Estate Risk

Last week the RadioShack earnings announcement and restatement that it will close 1,100 locations sent bankers scrambling back to their credit files to see if the beleaguered electronics chain composed any part of their commercial real estate rent rolls. It turns out that that for about 100 loans, there is exposure with an estimate of 36 of these at community banks. Luckily, Radio Shack has been downsizing and has gone to smaller and smaller footprints so that on average, the stores now make up less than 10% of the rentable space at these retail centers. Given that same-store-sales are down 14% and no value proposition in site, we think it is just a matter of time before RadioShack goes by way of Blockbuster, Circuit City and Borders Books.


As we are concerned over retail lending in general given the risk-adjusted return projections on the market combined with future supply/demand projections of retail square footage, we have updated our list of those retailers that have over a 10% probability of default on their debt or have store closing that could impact a material number of bank loans. Here is our latest list with data as of June 5th, 2014:


Family Dollar, Coldwater Creek, Dots, Sears/Kmart, Staples, Barnes & Noble, Aeropostale, Abercrombie & Fitch, Jones Group, Sbarro, American Eagle Outfitters, Rent-A-Center, Brown Shoes, GameStop, Build-A-Bear, Sprint, JC Penney, Wet Seal, Juicy Couture and Office Depot/Office Max. The retailers are in the midst of downsizing and their store closing should be monitored should there be tenant exposure.


In addition, there are broad categories of retailers that present above average tenant risk due to struggling industry economics. While all banks understand the limited viability of book and video stores, these are the other that have the potential to struggle and their future is reflected in their higher than average probabilities of defaults: Camara, stationary, tanning, beauty supply, electronics, computer repair, men’s clothing and small chain grocery stores.


The rise of Amazon, Google Shopping Express, eBay Now, and UberRush intensifies the competition for small business retailers as well as for certain large chains. For example, Google has partnered with Walgreens, which puts pressure on CVS. Amazon, which has the largest market share of same day delivery, puts pressure on all in the product categories in which they compete.


Retail properties are now changing quickly. 2014 has been hallmarked by a record number of store closings, a large percentage of these impacts banking lending. While the market remains semi-strong for retail replacement, that will not always be the case. This is especially true where retail construction is starting to pick up and even more supply is coming on line in the next three years. Our analysis of forward rents shows a decrease in many retail sectors and in many markets. The risk view is changing and in the next year it is time for banks to move up in retail lending quality.


Banks would be wise to continue monitoring both tenant performance and pay attention to tenant mix, lease structure and demographic changes in lending areas. By doing so, hopefully you won’t add banks to the long list of retailers that continue to struggle.