San Francisco Nordstrom Closing Spells More Trouble for Shopping Mall Investors
By Beyond My Ken - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=60524187

San Francisco Nordstrom Closing Spells More Trouble for Shopping Mall Investors

Last Tuesday’s news that Nordstrom was closing its downtown San Francisco location fed into the narrative that the city is in a “doom loop.” Whether or not that is the case, the closure could spell trouble for Commercial Mortgage-Backed Securities backed by a loan on the surrounding shopping mall.

The Nordstrom and a Bloomingdale’s are the anchor tenants of the Westfield San Francisco Center on Market Street between 4th and 5th Streets. In 2016, Westfield’s owners took out a $558 million, ten-year interest only mortgage on a portion of the property. The lion’s share of that loan, $306.942 million to be exact, went into a CMBS deal called DBJPM 2016-SFC.

The loan (which is described staring on page A-3-24 of this prospectus) is not collateralized by the two anchor tenants, so the Nordstrom closure does not directly impact cash flow available to mortgage bondholders. But it will reduce foot traffic and potentially cause other tenants to leave.

The mall and its immediate vicinity have been in a download spiral. When the loan closed in 2016, the collateralized portion of the Center including both retail and office space, was 93.7% occupied. By late 2022, occupancy had declined to just 51.9%. Among the retail tenants that left were Abercrombie & Fitch and the Microsoft Store. Meanwhile, the center’s two largest office tenants, San Francisco State University and anime-producer Crunchyroll, both left as well.

The largest remaining tenant is a Century multiplex cinema, which faces challenges from both the nationwide drop in movie theatre attendance and patron reluctance to visit downtown San Francisco. As local and national media have reported, property crime, homelessness, and public drug use are common in the vicinity. Mall security has become unable to fully protect customers, who frequently witness disturbing episodes. Just recently, a security guard shot and killed a robber, at a Walgreens adjacent to the mall.

The good news for bondholders is that a payment default is unlikely before 2026 because the mortgage is both interest only and fixed rate. But unless downtown San Francisco radically rebounds, the mall owner is unlikely to be able to fully refinance the loan and redeem all the principal. And that owner will unlikely be Unibail-Rodamco-Westfield which has announced plans to sell its entire US mall portfolio.

This is why DBJPM 2016-SFC has been suffering credit rating downgrades, at all levels of the capital structure. Before the Nordstrom closing, S&P had downgraded the senior bond from AA to A. It had been AAA when the deal was launched. The most junior “D” tranche, originally rated BBB- (the low investment grade rating) is now at CCC. S&P estimates that the property is worth around $300 million versus $1.2 billion in 2016.

James McIntyre

Chief Strategy Officer at Inclusive Prosperity Capital

1 年

How does S&P determine its estimates, “that the property is worth around $300 million versus $1.2 billion in 2016”? Has the investment been written down?

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Christine Kuglin

JD, LLM, CPA University of Denver

1 年

Nordstrom, generally, is not doing well. The Rack is performing better. This is not surprising.

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