THE dramatic shift to online shopping that has crushed U.S. department stores in recent years now threatens the investors who a decade ago funded the vast expanse of brick and mortar emporiums that many Americans no longer visit.

    Weak September core retail sales, which strip out auto and gasoline sales, provide a window into the pain the holders of mall debt face in coming months as retailers with a physical presence keep discounting to stave off lagging sales.

    Some US$128 billion in commercial real estate loans — more than one-quarter of which went to finance malls a decade ago — are due to refinance between now and the end of 2017, according to Morningstar Credit Ratings.

    Wells Fargo estimates that about US$38 billion in these loans were taken out by retailers, bundled into commercial mortgage-backed securities (CMBS) and sold to institutional investors. Morgan Stanley, Deutsche Bank and other underwriters now reckon about half of all CMBS maturing in 2017 could struggle to get financing on current terms. Commercial mortgage debt often only pays off the interest and the principal must be refinanced.

    The blame lies with online shopping and widespread discounting, which have shrunk profit margins and increased store closures, such as Aeropostale’s bankruptcy filing in May, making it harder for mall operators to meet their debt obligations.

    Between the end of 2009 and this July e-commerce doubled its share of the retail pie and while overall sales have risen a cumulative 31 percent, department store sales have plunged 17 percent, according to Commerce Department data.

    According to Howard Davidowitz, chairman of Davidowitz & Associates Inc., which has provided consulting and investment banking services for the retail industry since 1981, half the 1,100 U.S. regional malls will close over the next decade.

    A surplus of stores are fighting for survival as the ubiquitous discount signs attest, he said.

    “When there is too much, and we have too much, then the only differentiator is price. That’s why they’re all going into bankruptcy and closing all these stores,” Davidowitz said.

    The crunch in the CMBS market means holders of nonperforming debt, such as pensions or hedge funds, stand to lose money.

    The mall owners, mostly real estate investment trusts, have avoided major losses because they can often shed their debt through a foreclosure process.

    “You have a lot of volume that won’t be able to refi,” said Ann Hambly founder and chief executive of 1st Service Solutions. (SD-Agencies)