Once hailed as the Western Branch borough’s economic savior, the mall has become one of its biggest concerns. What happened? A $73 million “commercial mortgage-backed security” loan, taken out during
The churchlike front spire of the Chesapeake Square mall pierced the sky on a recent cloudy morning.
A few dozen cars dotted the parking lot in a sea of empty gray concrete. Faded storefronts reveal hints of department stores past: Macy’s, Sears.
Contrast that to the fall of 1989: A crowd of 4,000 gathered to celebrate the grand opening of the mall, which was expected to bolster the local economy.
“On the day that cash registers start ringing up sales at the Chesapeake Square shopping mall,” a reporter wrote in The Virginian-Pilot, “city leaders will begin counting their riches.”
Twenty-seven years later, in April, the 717,000-square-foot mall fell into foreclosure. Now in the hands of a bank, it sits in a state of limbo.
Once hailed as the Western Branch borough’s economic savior, the mall has become one of its biggest concerns.
The demise of the suburban shopping mall has popped up in headlines across America: the rise of online shopping, the rapidly changing retail landscape.
But behind it all, there’s another reason for struggling finances. Many mall owners borrowed millions through loans that cost little on the front end but are now coming due with a vengeance.
Property owners across Hampton Roads and the country took out these massive “commercial mortgage-backed security” loans when credit standards were low and expectations for retail growth were high.
Now that payback time is arriving, some owners already struggling with market changes are drowning in debt.
It’s a financial picture that few would’ve dreamed of in 1989, when Chesapeake’s then-mayor, David Wynne, greeted the mall’s arrival with enthusiasm.
“This is one of the most exciting things to happen in Chesapeake’s short history,” Wynne told the crowd at the grand opening, according to Pilot archives.
“It is the kind of facility you deserve.”
Chesapeake Square’s tale is a timely one.
Roughly a decade ago, the market for these types of commercial loans was at its height. Some $200 billion a year worth of them were issued between 2005 and 2007, according to a report from Texas-based real estate company Transwestern. Typically, they are packaged together and sold by banks to investors.
The situation echoes the residential real estate boom and bust, when banks offered massive interest-only home loans with little money down, thinking the housing market would just keep rising. Owners of commercial real estate – including malls, office buildings and hotels – similarly took out huge loans using their property as collateral.
Many of those loans began maturing around 2015.
In 2004, Chesapeake Square’s former owner, Simon Property Group, borrowed $73 million through J.P. Morgan Securities. Because the loans have an average span of 10 years, Simon had to pay up in 2014.
For the prior decade, the company had paid interest only, meaning that when the loan came due, it was a “balloon payment” of almost $65 million.
But the value of the mall had decreased by 40 percent during that time, according to Trepp, a New York-based company that tracks the commercial real estate market.
Mall officials negotiated a loan extension until early 2017. Last fall, however, they stopped paying on time.
Officials with CW Capital Asset Management, a special servicer called in to manage troubled commercial real estate loans, declined to comment for this article, but they took monthly note of the mall’s late payments in loan records:
October, 30 days delinquent.
”The borrower states that there will be insufficient cash flow …”
November, 60 days.
”It has come to light through conversations with the Borrower that there are no leasing prospects to fill the vacating Sears anchor’s space.”
Macy’s announced its departure early this year.
By February, the mall still owed $62 million and was headed for foreclosure. In April, J.P. Morgan bought Chesapeake Square for $50 million, according to the property deed.
The location of the old Macy’s store at Chesapeake Square mall in Chesapeake, Va., photographed on Monday, Aug. 29, 2016. In January 2016, Macy’s announced that the store would shutter its doors as part of a nationwide series of closures.
Kristen Zeis | The Virginian-Pilot
Those “riches” that Chesapeake expected to reap from the mall have been steadily falling since the early 2000s.
The mall brought in a peak of more than $1 million a year in real estate taxes between 2002 and 2005, according to city records. In fiscal 2016, it paid just over $576,000, the lowest since its opening.
Councilwoman Ella Ward, a longtime Western Branch resident, said she doesn’t think the mall was able to keep up with the times, but she’s “not giving up on it.”
She thinks the development of Interstate 664, which was completed in that area around the time of the mall’s opening, has allowed people to travel up to northern Suffolk for shopping instead of always staying around Western Branch.
The foreclosure “has been a huge disappointment,” Ward said. “But I’m just hopeful a developer will see some potential there.”
Western Branch residents have periodically urged the city to help with the mall, calling it a linchpin for economic growth in the area. But Steven Wright, Chesapeake’s economic development director, said city officials are limited in what they can do. Still, they aim to help attract some new anchor stores, he said.
“We understand the folks out there are very passionate about that area … and obviously the mall is a huge player,” Wright said.
Preston Wilhelm, senior business development manager with Chesapeake’s economic development team, said the retail sector is extremely competitive. It can generally be hard to attract big box stores without the consent of other retailers who may have exclusive-use rights in their leases, he said.
City Manager Jim Baker and other city officials say they expect a $21 million expansion of Portsmouth Boulevard to draw commercial development to the area.
Baker also said the city talked with the owner in the months before the foreclosure to try to encourage reinvestment in the mall.
“There’s only so much we can do” because it’s a private enterprise, he said. “We’re concerned about all our retail facilities and want to make sure they stay productive.”
When it was time to pay the piper, Chesapeake Square’s owners had few options. Ultimately they chose to walk away.
Joe Kennedy, a capital markets associate at commercial real estate company Cushman & Wakefield | Thalhimer in Virginia Beach, said it would have been hard for Simon – or Ohio-based WP Glimcher, which took over this year – to refinance recently because taking out another loan would have required lots of capital.
“It’s hard to internally justify throwing good money after what turned out to be bad money,” Kennedy said. The original deal was made at a time when expectations for rental revenue were high, he said.
It’s also becoming harder to refinance.
“Lenders are tightening their purse strings as unease surrounding the future of shopping centers grows,” Bloomberg wrote a few months ago when a Detroit shopping center under the nation’s second-biggest mall owner, General Growth Properties Inc., missed its loan payment.
General Growth’s default “may be a harbinger of trouble nationwide as a wave of debt from the last decade’s borrowing binges comes due for shopping centers,” Bloomberg wrote.
Other Hampton Roads malls are in a similar boat. Military Circle in Norfolk went into foreclosure last year after a $52 million payment came due. Lynnhaven Mall in Virginia Beach owes $235 million.
Chesapeake’s Greenbrier Mall, owned by Tennessee-based CBL & Associates Properties Inc., faces a $71.6 million loan payment that came due this month, Trepp records show.
“We are in discussions with the servicer to restructure the current loan and expect a favorable resolution,” CBL officials said in a statement emailed to The Pilot.
In total, Hampton Roads had around $634.5 million in distressed commercial mortgage-backed security loans as of May, according to Trepp.
Layron Miller literally helped build Chesapeake Square mall’s foundation: He laid the concrete in the 1980s.
After the mall opened, it became a community gathering place, he recalls.
“You did your chores so you could get money and go to the mall,” Miller said. These days, he said, it’s just not the same.
“It’s not a hangout place” anymore, he said.
Chesapeake Square houses 90 retailers and is anchored by Target, J.C. Penney and Burlington Coat Factory. The large spaces previously held by Macy’s and Sears are vacant. Target owns its physical store and was not a part of the mortgage loan.
Jones Lang LaSalle recently took over leasing and managing the mall. The company declined to be interviewed but sent The Pilot a statement saying it doesn’t expect leasing to be affected by the foreclosure.
“We look forward to working with the special servicer to further strengthen Chesapeake Square, which includes two unmatched opportunities to become an anchor tenant,” Senior Vice President Rick Vita said in a news release.
Now that the debt’s gone, management must attract new tenants if the mall is to survive. But the rise of online shopping has led to a sort of domino effect, experts say: Expanded online options dampen the pull of department stores, which are the traditional catalyst for successful malls.
Lulu Esconde, who works at a New York Jewelers kiosk in the mall, said she doesn’t see as many people around as in the past. She’s scared the mall may close.
“Everybody thinks it closed already,” she said.