The decision by J.C. Penney to shut 33 locations will have limited impact on commercial mortgage-backed securities in the short term, Fitch Ratings says. But in the long run, the general weakness in the sector may impede the general stabilization now being seen in the retail CMBS market.
It is not only J.C. Penney that is notably having difficulties among retailers. Sears Holdings and Best Buy are also mentioned in Fitch’s report.
“Both J.C. Penney and Sears have significant real estate portfolios in a wide range of markets. If large scale closures take place, we would expect dominant class-A malls to re-tenant space while weak malls could be put under pressure,” the rating agency says.
There are seven Fitch-rated deals that involve properties leased to J.C. Penney locations slated to close. In an earlier report, the rating agency commented on CBL & Associates Properties Inc.’s “proactive” stance in dealing with potential vacancies.
CBL acquired two Sears locations during 2013, in Lexington, Ky. and Nashville, which the real estate investment trust will redevelop and look to re-lease to smaller shop tenants paying higher rents.
“Unlike the Penney opportunity, the Sears stores were located in some of CBL's most productive malls while the Penney closures are in four of CBL's lower-productivity assets. The redevelopments face execution risk given potentially lackluster retailer demand at these locations, as well as upfront capital expenditures and related downtime in redeveloping the assets, which can ultimately weigh on credit metrics,” Fitch notes.