Wolf Richter points out that the COVID-19 pandemic has greatly accelerated a trend in the business property market that began some years ago.
The process started years ago. Ecommerce, a structural shift in how Americans shop, has wiped out retailer after retailer, from big ones such as Sears Holdings and Toys ‘R’ Us, to smaller ones. It created a nightmare scenario for malls and landlords – including REITs – that own the malls, and for investors that hold the mortgages and the Commercial Mortgage-Backed Securities (CMBS) that these mortgages have been packaged into.
And now that the pandemic is compressing future years of brick-and-mortar meltdown into a few months, the whole schmear is coming apart.
. . .
Americans are spending their unemployment and stimulus money, and they’re buying lots of stuff, they’re just not buying it at the store. The ecommerce announcements by various retailers – those that have vibrant ecommerce businesses – have been stunning.
For example, Best Buy said in an update a few days ago that quarter-to-date through July 18, online sales have surged 255% (not a typo) compared to the same period last year. The Commerce Department will release second quarter ecommerce data in early August, and it will be stunning. But the business at malls is dead.
With thousands of stores being shuttered permanently, and with other stores that haven’t been shuttered yet unwilling or unable to pay rent, malls have been pushed to the brink.
. . .
Mall creditors are not amused. Mall properties have taken a huge hit in value – down 33% over the past 12 months and down nearly 50% over the past three years, according to the Green Street Property Price Index.
And no lender wants to end up with a bunch of zombie malls on their books. So they’re motivated to talk. But there is just no good way out.
There's more at the link.
Adding to the problem is the current urban unrest, which has seen many malls and retail districts attacked by mobs of looters. For example, the top-of-the-line stores along Chicago's Magnificent Mile have mostly been boarded up, to protect their contents - not always successfully. Similar events have occurred in many shopping districts in many cities. Whether all of those stores will reopen is as yet unclear. If I were the store owner, I'd certainly think long and hard before investing even more of my money in cities where the authorities pander to the mob and allow them to loot and burn unhindered.
Think about what this means for your day-to-day needs. You may rely on shops in nearby malls and business districts. What if they aren't there any longer? You'll have to drive further, or order online and endure the wait until your purchases can be delivered. (I've noticed a growing lag between ordering and delivery from many online outlets. I daresay the average wait time for packages is now at least a week, if not ten days or more. Amazon.com still offers its Prime service, but in many cases deliveries take longer than the previously advertised two business days. I've had to wait up to a week or more recently. I guess we can put that down to the vastly increased order workload, and the stress put on delivery systems to get a much larger volume of goods from vendor to customer.)
The business closures aren't limited to stores. According to a recent report, 60% of restaurants that were forced to close during the pandemic have permanently shut down. That's thrown a lot more people out of work, not just in those restaurants but in the supply chains they used. It's also going to mean greater inconvenience for many consumers who relied on eating out rather than cooking at home. They're likely to be cooking for themselves for rather longer than they'd intended.
Towns and cities are going to feel the pain even more than consumers. Many municipalities depend on business taxes to fund many of their operations. If shops are doing less business, they pay less turnover tax. If malls shut down, the property tax owed on their property is unlikely to be paid. The people left unemployed as a result no longer use their wages and salaries at other local businesses, to be taxed in their turn. Many online transactions return no tax income at all to cities and states, despite laws that are supposed to compensate for that. When so many people are so short of money, they're unlikely to feel obliged to report such purchases and pay estimated sales tax on them.
This also means that cities and towns will turn to alternate sources of income to compensate for what they're losing in business taxes. For example, Nashville, TN recently announced a 34% increase in property tax.
Nashville Mayor John Cooper said he would not have considered an increase this large if Nashville was not facing record financial challenges.
But this is exactly why critics say they can’t afford to pay thousands in additional taxes.
Again, more at the link.
I note that most municipalities are not considering major cuts to their staff and services to cope with their financial challenges, even though many of the latter are far from essential. No, they'd rather keep their armies of drone workers and charge residents more for the dubious privilege of having them. In their opinion, taxpayers are clearly sheep to be sheared. One hopes that those taxpayers would vote their fiscal oppressors out of office at the earliest opportunity, but sadly that never seems to happen. Oh, well . . . some of them vote with their feet by leaving. That's what Miss D. and I did, some years ago, and we've never looked back.
There's not a lot we can do about the businesses closing all around us, except to patronize those that are really important to us, spending our consumer dollars there in an effort to keep them open. I think it's very important to have local resources such as pharmacies, vehicle repair shops and the like. A local supermarket is also an important benefit, even if it offers only a limited selection, in case lockdowns or unrest prevent us getting to stores further away.
I guess all of us are going to have to use our dollars as wisely as possible, not only for our own needs, but to support our community. What resources, what businesses, do we really need locally? Let's patronize them, and help to make sure they don't go away. If they do close their doors, we'll have to plan (and pay for) much deeper personal and family reserve supplies, so that we can cope for longer periods without shopping.