Retail Bubble Bursts! 8,460 Store Closures Expected in 2017 (Largest In Modern History)

Retail REIT and CMBS investors were pleased with the recovery after The Great Recession when retail commercial real estate prices fell then rebounded. But we are seeing a crucial turn in retail real estate values.

The cause? The 2017 surge in retail store closings.

In terms of square footage, it is anticipated that retail store closings will be the largest in modern history.

Smaller retail footprints like RadioShack lead the announced closures.

Digital (online) shopping took its toll.

And stagnant wage growth for the majority of Americans hasn’t helped. The worst after a recession in modern history.

Retail vacancies are now about 10% again after zooming upwards during The Great Recession.

Retail (mall) REIT Kimco has not had a good time since July 2016.

If life gives you lemons, …

Did someone mention Malls? As in Shauna Malwae-Tweep?

Restaurant Same-Store Sales Match Declining Real Average Weekly Wage Growth Declines

First, we have the retail chain closings that adversely effected REITs and CMBS. And Columbus, Ohio’s own Limited Stores announced in January that it is closing ALL 250 of its stores. And even Victoria’s Secret and Bath and Body Works are closing in Scranton, PA’s iconoic Steamtown Mall.

Now we have restaurants falling by the wayside but we can’t blame that on Amazon or digital competitors.  The National Restaurant Association (NRA) released its same-story sales index for February and it shows continued weakening (although an improvement from August 2016).

Restaurant closings? Florida-based Bloomin’ Brands (NASDAQ: BLMN), the parent company of Outback Steakhouse, Bonefish Grill, Carrabba’s Grill, and Fleming’s Steakhouse, announced last week the company will shutter 43 of its 1,500 underperforming locations in 2017. 43 out of 1,500 stores is small relative to closing all Limited Stores. Even Appliebee’s, Chili’s, Ruby Tuesday’s, Buffalo Wild Wings and Magianno’s Little Italy restaurants are facing a bleak 2017.

While you can get delivery from many more restaurants than you used to, restaurants are not feeling the pinch like retail stores.  Still, sagging wage growth is the culprit for both retail and dining out.

CMBX, the reference security for CMBS, has generally followed the stagnating wage growth since early 2015.

So while Amazon and the digital shopping trend is partly to blame. stagnant wage growth is another factor.

With stores closing at Scranton’s Steamtown Mall and Chili’s closing stores, where will Michael Scott get his baby-back ribs?

 

 

Bank Lending Shrinking As Wage Growth Remains Stagnant

I appeared on Fox News Radio today on the Tom Sullivan Show. He asked me about the non-existant inflation report today, the poor retail sales numbers and the zero percent wage growth report. (One listener sent me an angry email saying all lending trends were positive — he must be a golfer that is confusing declining scores with success).

We also got around to discussing positive bank profits. But I pointed out that bank lending is declining in the face of stagnant wage growth.

Bank Loans and Leases YoY are declining.

As are Commercial and Industrial Loans YoY, the lowest level since July 2011.

1-4 unit mortgages outstanding? We are still below the YoY growth rate at anytime between 1992 and 2008.

Multifamily mortgage debt outstanding is growing and is back at 2007 levels.

Wage growth?

Tough market conditons!

Battle Royale: JPMC’s Dimon and Minneapolis Fed’s Kashkari Battle Over Bank Capital

Bloomberg has nice piece on the battle between JPMorganChase’s Jamie Dimon and the Minneapolis Fed’s Neel Kashkari.

(Bloomberg) Jamie Dimon is America’s most famous banker, and Neel Kashkari is its most outspoken bank regulator, so it’s not a shock that they would eventually come to blows. What’s interesting is that their contretemps is over an acronym that most Americans have never heard of, but one that may be central to preventing another recession.

TLAC, which is pronounced TEE-lack, is something you need to know about if you want to judge the sparring between Dimon, the well-coiffed chief executive of JPMorgan Chase & Co., and Kashkari, the very bald man who ran for governor of California on the Republican ticket and is now president of the Federal Reserve Bank of Minneapolis.

On April 6, Kashkari went after Dimon in a way that circumspect central bankers ordinarily don’t. In an essay published on Medium and republished on the Minneapolis Fed website, he challenged Dimon’s assertion in his annual letter to shareholders that 1) there’s no longer a risk that taxpayers will be stuck with the bill if a big bank fails, and 2) banks have too much capital (meaning an unnecessarily thick safety cushion). Wrote Kashkari: “Both of these assertions are demonstrably false.”

This is where TLAC comes in, so bear down for a bit of bank accounting. TLAC stands for total loss-absorbing capacity. The more capacity that a bank has to absorb losses, the smaller the risk that it will require a taxpayer-funded government bailout. So lots of TLAC is good. But not all TLAC is created equal. Kashkari argues that a lot of what Dimon calls TLAC on paper wouldn’t be available to absorb losses in a real-world crisis.

Imagine that a whale swims up the Thames River and beaches itself in the City of London, causing billions of dollars in losses to Bank X. If the loss is really big or Bank X is weak (unlike JPMorganChase, which most emphatically is not weak), then one such hit could push it into insolvency. The first thing that happens is that the price of the stock falls to zero. Shareholders, in other words, are the first to absorb losses. That’s fair: Shareholders get all the profit that a bank makes after paying its expenses, so they should have to take the hit when the bank’s profit is wiped out unexpectedly.

The fight between Dimon and Kashkari is over who absorbs the rest of the loss. According to Dimon, it’s the unsecured bondholders. (Unsecured meaning they don’t have a legal claim to any specific asset on the bank’s balance sheet.) Unsecured bondholders are informed that, sorry, there’s been a loss. They’re not going to get their interest payments anymore, and their bonds are being converted into common shares. Now they’re at the back of the line with the rest of the bank’s shareholders; they’ll get paid only if the bank starts making a profit again.

The beauty of the system outlined by Dimon is that taxpayers aren’t exposed to risk because if a bank gets in trouble it has a great, big escape hatch: It simply wipes out its bondholders, thus conserving its money.

“It sounds like an ideal solution,” Kashkari writes. “The problem is that it almost never actually works in real life.” In a financial crisis, regulators worry about contagion. If bondholders of one bank are defaulted on, those of other banks will worry they’re next and yank their support, causing a downward spiral of confidence that crashes the economy. So the regulators make sure bondholders keep getting paid.

“Indeed,” Kashkari writes, “the most recent crisis showed that even some debt holders who had been explicitly told that they would take losses during a crisis got bailed out.”

Kashkari argues that regulators and bankers should stop acting as if bonds are part of TLAC (which, remember, stand for total loss-absorbing capacity), because when push comes to shove, bondholders will absorb few if any losses. Taxpayers will be forced to step up and make sure they keep getting paid.

Kashkari also disses Dimon’s argument that banks’ safety cushions are needlessly thick. Dimon wrote to shareholders that if the Federal Reserve standards weren’t so tough, “banks probably would have been more aggressive in making some small business loans, lower-rated middle market loans, and near-prime mortgages.” Kashkari’s response? “Mr. Dimon argues that the current capital standards are restraining lending and impairing economic growth, yet he also points out that JPMorgan bought back $26 billion in stock over the past five years. If JPMorgan really had demand for additional loans from creditworthy borrowers, why did it turn those customers away and instead choose to buy back its stock?”

Mr. Kashkari has a valid point. Check out the bank capital to total assets during the housing bubble of the last decade. From 2004-2007, bank capital to total assets exceeded 10%, but fell under 10% for 2008. And we all remember TARP (the Troubled Asset Relief Program signed into law on October 3, 2008). Starting in 2o08, bank capital was strengthed to 12.74% of total bank assets by 2010, but has slipped to under 12% by 2013.

Of course, not all capital (and capital ratios) are equal. Take a look at Chase Bank’s Basel III standardized regulatory capital and advanced transitional regulatory capital. Chase Bank’s Tier 1 capital under Basel III Advanced Transition is now under 10% at 9%. JPMorgan_Chase_Co_4Q16_Basel_Pillar_3_Report

JPMorganChase has credit risk exposure to residential and commercial real estate, C&I loans, consumer auto loans and student loans.

Can any large bank survive if home prices and/or commercial real estate prices burst and fall 20%?

So while it seems that Dimon is correct (stiff the unsecured bondholders), Kashkari is also correct in that regulators may panic (again) and try to preserve the unsecured bondholders. That is, bail out the unsecured bond holders.

Maybe Dimon and  Kashkari can settle their “battle royale” by doing it “the Swanson Way.” 

Commercial Mortgage Originations Suffer First YoY Decline Since 2007 (C&I Lending Growth Dropping)

Yes, commercial mortgage originations suffered the first YoY decline since 2007.

According to the Mortgage Bankers Association 4Q 2016 commercial real estate loan originations survey, mortgage originations related to discretionary segments of the economy are in complete free fall with retail and hotel volumes down 19% and 39%, respectively4Q16CMFOriginationsSurvey

A decrease in originations for hotel, health care, and retail properties led the overall decline in commercial/multifamily lending volumes when compared to the fourth quarter of 2015. The fourth quarter saw a 39 percent year-over-year decrease in the dollar volume of loans for hotel properties, a 24 percent decrease for health care properties, a 19 percent decrease for retail properties, a 4 percent decrease for industrial properties, a one percent decrease in multifamily property loans, and a 6 percent increase in office property loans.

At least commercial and industrial lending at commercial banks has positive YoY growth rate (although plunging like a paralyzed falcon).

Of course, the retail store closings are problematic.

Say, I wonder if Federal Reserve Chair Janet Yellen bought her scarf on line or at a brick and mortar retail store?

Ratings Shopping Haunts Commercial Mortgage Bonds as Risks Rise

The retail slaughter caused by on-line shopping (Amazon effect) and sluggish wage growth since The Great Recession are taking a toll on large shopping mall stores and, as a consequence, commercial mortgage-backed securities (CMBS).

(Bloomberg) – Matt Scully and Adam Tempkin – Only a decade ago, global investors got a hard lesson about the dangers of relying on rosy bond ratings. Now they’re getting a reminder — this time in frothy corners of the $528 billion U.S. commercial-mortgage bondmarket.

As delinquencies on loans rise, some ratings firms are walking back their grades on bonds tied to properties like shopping malls and office towers, just a few years after assigning them. DBRS Inc. last month lowered the AAA ratings it had given 294 interest-only bonds after realizing it had been too lenient. Also in March, Kroll Bond Rating Agency Inc. cut some of its grades on a $1 billion bond issued in 2014, citing weakness in Texas loans exposed to energy prices.

The reversals underscore how forces that brought trouble to financial markets before are still percolating through Wall Street today. No one sees the dangers as being nearly as grave as they were during the home mortgage bust. But the same ratings business model used during that period still prevails — meaning that the banks that put together debt securities still pay for the credit grades, and they can shop around for the firm that will give them the highest ratings under the loosest criteria.

According to Trepp, retail delinquencies have risen to 6.12% as of March 17, 2016 (following only industrial loans).

And a foreclosure appeared in the WBCMT 2007-C32 CMBS deal (Rockvale Square in Lancaster, PA). Not to mention a non-performing property in teh BSCMS 2007-PW15 deal.

The WBCMT 2007-C32, a Wachovia deal, is now rated at CCC+ or lower for tranches B through D. Tranches E and F are rated as D by S&P. The H tranche, rated as C by Moody’s, has eaten $15.5 million in losses thus far. Tranches J and K are gone after sustaining losses of $56.6 million and $33,46 million, respectively. At least tranches A1, A2 and APB paid off with no losses.

And with delinquencies rising over the last year, the retail forecast is gloomy.

Parks and Recreation’s Tom Haverford may have to change his tune on “things are forever.” Particularly if shopping at Macy’s , Sears, JC Penney’s, The Limited, Abercrombie and Fitch, etc. 

Yes, Tom, you can buy things on-line. Unless your wages are slow to grow and you have accumulated significant debt. Particularly during the worst wage recovery after recession in modern history.

 

US construction spending rose to nearly 11-year high?? (how about slowed to 3% YoY)

According to the US Census Bureau (as interpreted by Fox News). US construction spending rose to nearly an 11 year high.

WASHINGTON – U.S. developers ramped up construction spending in February to the largest amount in nearly 11 years, led by more building of homes, highways and schools.

The Commerce Department says construction spending rose 0.8 percent in February to the highest level since April 2006, after two months of declines.

Builders are rapidly putting up more homes in response to strong demand that has pushed up prices for existing homes. Yet it hasn’t yet been enough to relieve a shortage of homes for sale. The accelerated building could boost the economy this year.

State and local governments spent 0.9 percent more on construction, driven by roads, schools and recreational buildings.

The federal government, meanwhile, cut construction spending for the second straight month and has cut back 9 percent from a year ago.

Here is the report from the Census Bureau.

The 11-year headline from Fox is really overselling the report.

In fact, construction spending has slowed dramatically YoY to 3% for February 2017.

Non-residential construction spending? It slowed to under 1% in February YoY.

Residential construction spending actually rose 6.36% YoY, but still remains considerably lower than the 22.6% YoY in August of 2015.

The more accurate headline should have been “Construction Spending Slows.” But that is not a feel-good business headline.

But I suppose that Fox News’ headline is better than the Pawnee Sun headline.