Loss severities on retail loans are likely to trend upward for the next several years as defaults on retail loans increase, according to Fitch Ratings.
‘Declining consumer spending and the shrinking U.S. economy will increase retail vacancies to a new high, as bankruptcies, store closings and retail consolidation continue,’ says Senior Director Adam Fox.
Fitch expects that losses on retail loans may increase as much as 34% to 60% from the five-year cumulative average of 44% for current defaults. Special servicers will foreclose on properties as borrowers become unable to fund operating shortfalls due to the loss of tenants.
Special servicers may need to explore several different options to maximize recoveries, Fitch says. The rating agency notes that single-tenant spaces may be marketed to non-traditional entertainment tenants or subdivided in order to attract smaller tenants. Large vacant mall locations, such as those left vacant by Steve & Barry's or Macy's, typically find more interest by subdividing the space or even selling the space back to the mall operator for redevelopment, Fitch says.
Retail delinquencies account for $1.7 billion of the $6.2 billion total delinquencies in the Fitch Loan Delinquency Index. The Loan Delinquency Index across all property types is 1.28%, with 1.17% of all retail loans within the index currently delinquent. Fitch expects defaults in the retail sector to contribute a greater percentage of the index into 2010.
SOURCE: Fitch Ratings