Just a few years ago, it seemed that Tunisian fashion designer Max Azria was at the top of his game. Kim Kardashian, Heidi Klum and Angelina Jolie were wearing his signature slinky dresses, and his empire, which began with just one boutique in Los Angeles, had expanded to include 700 freestanding boutiques and shops-in-shops at top department stores across the globe.
That all came crashing down in March, when his fashion label, BCBG Max Azria, filed for bankruptcy protection and announced it would close 120 of its stores. Behind the scenes, Azria’s business was laden with debt, which he’d refinanced with more expensive debt, including a $135 million cash infusion in 2015 from affiliates and clients of Guggenheim Partners, the investment banking firm.
Eventually, the company buckled under the burden of its commitments, and its investors couldn’t see the sense in throwing more good money after bad.
BCBG is just one of many retailers to crumble this year. Macy’s, Sears, Payless, American Apparel, the Limited, Wet Seal and the electronics chain hhgregg have all announced store closures or bankruptcies since the beginning of 2017 in a great collapse of the retail dominoes. In a statement Feb. 24, JCPenney said it planned to shutter 130 to 140 stores and two distribution facilities, citing slower consumer traffic and muted sales. Its announcement came just weeks after Macy’s and Sears announced their own store closures.
As of press time, Gymboree, the struggling children’s clothing retailer backed by Bain Capital, was reportedly preparing to file for bankruptcy as it faced a June 1 interest payment on its debt.
“I think retail is fucked, plain and simple,” said Billy Macklowe, the head of major New York development firm the William Macklowe Company (and son of famed developer Harry Macklowe), speaking at the Haute Residence luxury real estate summit at the Core Club in late April.
Macklowe pointed to empty storefronts on Manhattan’s Madison and Fifth avenues, as well as in Soho. Tenants are looking for lower rents, and “the first landlord that blinks” will reset the market, he said. “Every retailer will pounce and smell blood in the water.”
The collapse of so many companies could have far-reaching consequences for retail-driven real estate owners and investors across the country, who, seeing the demise of their tenants, must backfill space or risk seeing their own bottom lines deteriorate.
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Many of the retailers were backed by private equity. “The private equity guys who do these deals declare a new bankruptcy every day,” said Howard Davidowitz, chairman of national retail consulting and investment banking firm Davidowitz Associates. “It’s a moment of reckoning. Reality has arrived, and it’s going to be very, very bad for the guys in the brick-and-mortar business.”
Edward Dittmer, vice president of CMBS at Morningstar Credit Ratings, added: “If you’re faced with decision right now to invest more cash with all negative news going around, you probably won’t.”
Insiders say the retail collapse will result in winners and losers — not everyone is going down. It’s survival of the fittest.
Azria, who appears to be on the losing side, is already feeling the pain. The designer recently defaulted on $34.6 million in CMBS loans attached to a 601,979-square-foot portfolio of Los Angeles warehouses used to house BCBG stock. Per the bankruptcy filing, the warehouses will sell in a court-supervised auction in May. If they receive no acceptable bids, Azria will attempt to negotiate a debt-for-equity swap with lenders. BCBG, which leases the warehouses from its founder, reportedly owes its lenders close to $500 million.
The expiration of a wave of CMBS, inked pre-financial crisis, is likely to result in more Azria-style casualties in the next year.
For instance, about $29.82 billion in loans securitized by CMBS issued since 2010 could be affected by JCPenney’s store closures alone, according to investment research firm Morningstar. The research firm also identified 17 CMBS loans with a combined balance of $454.6 million that have exposure to hhgregg stores slated for closure.
“It’s an impending disaster for giant money,” Davidowitz said.
In his annual letter to shareholders last month, Vornado Realty Trust’s famously brash CEO, Steve Roth, sounded like he was forecasting the retail apocalypse.
“I don’t believe we can grow our way out of this mess,” he said of the string of retailer bankruptcies making headlines. “I believe the only fix for brick-and-mortar retailing is rightsizing by the closing and evaporation of, you pick the numbers, 10 percent, 20 percent, 30 percent of the weakest space. This very painful process will surely take more than five years. It will also create enormous opportunity for those with the capital and management platforms to feed on the carnage.”
Roth is not alone is seeing a potential upside for vulture investors.
Hedge funder Jason Mudrick, whose Mudrick Capital Management focuses on distressed investments, recently told Bloomberg that retailers’ problems are here to stay.
“This is a forever trend,” Mudrick said on Bloomberg TV. “When you think about how things are going to look 10 years from now, or 20 years from now, our parents will be dead, our kids will be adults — you think more people are going to be shopping online or less? This is the Amazon effect, and it’s here forever.”
The party line
Mall owners, who are arguably the most exposed to the retail crisis, are taking a sunnier approach to assessing it.
“This whole narrative is way overstated,” Stephen Lebovitz of CBL, one of the U.S.’s largest mall operators, told The Real Deal. “The number of malls that have actually gone away is really small — it hasn’t happened.”
Sandeep Mathrani of GGP quipped: “It’s like I always say, the Romans had a bazaar to go to, and the aliens thousands of years from now will have one, too.”
Indeed, the early days of the crisis have revealed a stark bifurcation in the ramifications for Class A mall landlords, many of whom say they’ve actually benefited from the rollover of struggling retailers’ leases, and for those lower on the pecking order.
In many cases, Class A mall owners have hustled to attr上海千花社区