Properties with weaker sales or more out-of-the way locations, often known as class B or C malls, could be at higher risk. There are more than 350 malls in the U.S. that are categorized as B malls, according to real estate research firm Green Street Advisors, and more than 325 that are class C.

Companies owning just a handful of malls that are performing poorly can often just turn over the properties to lenders. Individual malls in CMBS usually are financed on a non-recourse basis, meaning creditors can’t ask the parent company to make good on the loans.

But the problem for mall owners is that the pain is so widespread across the country. Malls aren’t just suffering in Houston or Los Angeles, they’re struggling just about everywhere. That can put the entire company in jeopardy.

Among retail properties with delinquent mortgages, the appraised value of the space had fallen by an average of 34% from when the loan was made, according to an analysis of commercial mortgage bond data through October from Wells Fargo & Co.

For example, the Park Plaza, a CBL mall in Little Rock, Arkansas, was valued at $33.1 million in August, down more than 75% from its 2011 appraisal of $142 million. CBL defaulted on the debt and “intends to turn the collateral back to the lender,” according to a Sept. 17 note by ratings analysts at DBRS Morningstar. One factor potentially complicating the mall’s options: Dillard’s Inc., the department store anchor, owns about half of the property’s retail space. Dillard’s declined to comment.

‘Absolute Transition’
With those big drops in values, owners would take a huge hit if they sell assets. The declines also complicate efforts to underwrite new financing or amend debt terms, said Rhona Kisch, who heads the real estate practice group at law firm Seward & Kissel. Kisch co-heads a task force the law firm set up on commercial lease and loan restructuring in response to the pandemic.

“It’s hard to restructure in an environment where you don’t know the value of your assets,” Kisch said. “We’re in a moment of absolute transition and we don’t know necessarily where things are going.”

That doesn’t mean negotiating with lenders and restructuring debt out of court is impossible. Parties have an incentive to avoid the expense of the bankruptcy process. Washington Prime told investors in August that it had enough flexibility to avoid violating the terms of its credit lines and bonds.

Complicated Debt
Even with the right incentives for all parties, the balance sheets of mall owners have become more complicated as owners have used a growing amount direct loans and unsecured debt over the past decade. Where CMBS once constituted the majority of retail commercial real estate debt financing, now the securities account for just about half of the borrowings.

Direct lenders often make loans for three years with an opportunity to extend at the end, while CMBS usually mature in closer to 10 years. That difference positions lenders to make faster and more aggressive repayment demands on borrowers.