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Experts have been warning of it for weeks, and now, the latest chapter in this global economic collapse comes as thousands of announcements of loan defaults and bankruptcies pour in from retailers big and small.
In this video, we’ll discuss the current economic meltdown facing landlords and retailers alike, as rents go unpaid and businesses crack under the pressure. We are going to show you the numbers, the expert estimates, and what this all means for the US and global economy as we sink further into the worst financial crisis the world has seen in decades.
Thousands of default notices have been piling up as some businesses have now gone as long as three months without making rent payments. Although some landlords are more understanding than others as the pandemic wipes out customer foot traffic and forces brick and shelter-in-place orders force mortar stores to shutter, patience is running thin. The commercial real estate market is running rampant with fear on all sides.
In the wider retail sector, $7.4 billion in rent for April went unpaid, which makes up about 45 percent of what’s owed, according to data analyzed by CoStar Group.
Typically, landlords would begin to send out default notices to retailers as quickly as 10 days after a payment was missed. Now, waiting weeks or even months seems to be the new standard.
According to Vince Tibone, senior analyst at Green Street Advisors, landlords are within their rights to push for rent payments, as they are backed by legal contracts. However, he also pointed out that, seeing as the retailers are on the brink of bankruptcy, meeting their rent checks just isn’t possible.
When retailers can’t pay, and the pressure from default notices isn’t seeming to get the job done, landlords can resort to more drastic actions.
This is exactly what happened at Stage Stores, a popular US department store that specializes in selling brand name apparel, accessories, cosmetics, footwear, and housewares at discounted rates. Despite its popular subsidiaries like Goody’s and Palais Royal, as well as around 800 locations across the country, Stage Stores filed for Chapter 11 bankruptcy on May 10 of this year after attempts to find a buyer failed.
Filing for Chapter 11 gives retailers the ability to reject unwanted leases, but they must continue to pay rent throughout the process, up until the point at which the court approves the cancellations. This task is made much more difficult when little or no revenue can come in due to the widespread lockdowns instituted across the United States. Even in the event that the stores could open, consumers are not keen to spend on extraneous purchases in the current climate, making it hard for retailers to get an injection of extra, and much needed, cash from going-out-of-business sales. Landlords and retailers alike needed to come together and treat the pandemic and the economic collapse as a shared pain between the two.
Stage Stores found itself unable to pay rent for the months of March, April, and May after it was forced to shutter its stores and furlough almost all its staff in response to the health crisis and the state lockdowns.
As a result, landlords began locking the company out, threatening to remove the debtors from the property and do away with the in-store inventory.
Pressure from default notices and follow-up actions like locking up stores or terminating leases was also cited in the bankruptcy of Modell’s Sporting Goods, America’s oldest and longest-running sporting goods store.
Stage Stores and Modell’s Sporting Goods are just a few among many chains that ceased paying rent after the pandemic forced most US stores to shut their doors to customers, gambling that they could hold on to some cash before landlords demanded payment.
Other big name retailers like Neiman Marcus Group, J.Crew, and J.C. Penney have also filed for Chapter 11 bankruptcy protection this month. These high-profile bankruptcies drove the TTM retail default rate to a record 15.5 percent. According to Fitch Ratings, one of the three nationally recognized statistical rating organizations in the US, this number could reach 19 percent by the end of 2020, with large defaults expected from additional major retailers such as Serta Simmons, Ascena Retail, and Jo-Ann Stores.
Larry Fink, who runs the $7.5 trillion-valued global investment management corporation Blackrock, said that bankers told him they “expect a cascade of bankruptcies to hit the American economy.”
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