Defaults on commercial loans related to retail expected to slow this year

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4page_img8-bigCommercial loans tied to retail properties will find new strength over the coming year, as retailers find new efficiencies.

The record pace of retail defaults and store closures will likely slow in the coming year. retailers are benefiting from newfound efficiencies and an improving economy. Analysts believe that even struggling to department stores, like Kohls and Macy’s, could see their situation improve in 2018.

Moodys analysts anticipate a better outlook for retail across the board. Moodys predicts that the owners of retail properties could see growth in operating income between 3 1/2 to 4 1/2% over the coming year. 5 out of 14 categories of retailer may even see profits grow higher than 5% in 2018. Moodys claims particularly strong players will include online sellers, dollar stores and home improvement retailers. Warehouse clubs, department stores, office supply stores, auto retailers, apparel sellers and drugstores will continue to struggle.

2017 was particularly dire for brick-and-mortar retailers. Store closures grew by 224% over the course of last year. Retailers planned to shutter a total 6879 locations by the tail end of 2017. 6,163 store closures had already taken place at the end of last November. 2017 broke the record for store closures which was previously set during the depths great recession.

The defaults in retail related commercial loans seen last year seemed to have little to do with the economic situation.

Paradoxically, in spite of record breaking store closures, consumer confidence and retail sales overall reached all-time highs. Store closures last year seemed to have occurred mainly in long brick and mortar retailers unable to adapt to changing consumer shopping habits. The National Retail Federation found in a recent survey that last year’s Christmas shopping season was the first time record for the majority of those surveyed plan to shop online exclusively. 59 percent of consumers surveyed by the group had no plans to do holiday shopping at a mall or department store.

The holders of retail based commercial loans are expected to adapt and defaults are expected to slow as a result.

The record number of defaults last year was likely among retailers who were unable to keep pace with changes in consumer shopping habits. Moodys cites restaurants as a particular example of an industry that has adapted to the needs of consumers. “Consumers are wrestling with higher non-discretionary spending needs while restaurant companies face higher operating costs — predominantly labor — and challenging traffic trends,” said Moodys vice president Bill Fahy. According to Moodys restaurants and other retailers are expected to meet these and other challenges over the course of the coming year. As retailers close more locations, these same retailers will likely find better ways to boost sales at their remaining locations. Moodys expects the wave of defaults to peak by March of this year to 10 1/2%. By this October these defaults are expected to slow with an estimated 4.9% of retail debt in default by that time.

Dennis Dahlberg
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177 NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
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About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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