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Stranded assets are the beached whales of capitalism. Capital invested in what looked like a good long term bet, that has now turned into an illiquid headache due to a change of circumstances. This term is often used in the context of regulation and environmentalism, but assets can become stranded in other ways:
If you keep even half an eye on the investing scene, you know that commercial real estate in general, and retail in particular, has been in trouble for some time. The advance of online shopping and networked business in general has been relentless and deadly. ‘Category killer’ store fronts and department stores alike have fallen to bankruptcy and reorganization, shopping malls have lost their anchor tenants, gone under and been rebuilt into everything from housing to entertainment centers. And that was before COVID, and before looters and arsonists showed up at the door.
Few retail establishments own their premises. The small operation or franchise might have a mortgage held by a local bank. Storefronts in a strip mall are likely leased from a development company, which in turn owes that mortgage. Large scale malls or a chain of branded stores are likely to have been ‘securitized’, with the loans that funded them packaged with others in one of the famous derivatives that caused so much trouble back in 2008.
Suppose you are the holder of some of those retail mortgages, or packages of them in the form of REITs or CMBS. Things have been looking bad, with high tenant turnover and markdowns of credit quality tracking the advance of online selling. Then along came COVID and shut down your tenants for weeks, putting some out of business, and others are withholding rent. That whale is looking pretty stuck at this point, and you own it.
Now some of your properties in sketchier neighborhoods are visited by local homies or Antifa, doesn’t matter which, who clean out your tenants and finish by torching the place. Horrible, right? Wrong! This is awesome, you just got liquid!
The business that just got trashed may or may not have insurance, good luck to them. But since the property was securing a loan, it almost certainly did have insurance. And unless the managers were idiots, it covers little things like arson. You may have lost any upside on that property (like there was any left) but at least the replacement value is going to be coming back in good old fashioned cash!
Yes, the investor walks away a survivor, if not a winner. Who loses? Well the insurance companies for sure, but they’ll put up the rates on similarly situated properties and make it back in the future. Who’s stuck are those who depended on the tenant businesses, for employment or local shopping. Because who’s going to be fool enough to put fresh capital into the situation that resulted in a stranded asset? If they’re lucky, the ‘hood might get a dollar store to replace the Target, grocery store, or strip mall. More likely, it’ll be a vacant eyesore until the city grabs it for back taxes and hands it over to some race-hustling crony.
It’s been noted that neighborhoods that were torched in the riots of the late ‘60s and early ‘70s took decades to recover, if ever. Expect it to be worse this time, the real estate markets have become much more efficient in the intervening time.Published in