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Why do landlords say they’re happy that Sears is shuttering stores?
At least publicly, a number of U.S. mall owners have stated that any Sears locations closing as part of bankruptcy proceedings will provide a long-awaited chance to redevelop their shopping centers with healthier, traffic-driving tenants.
“We think this is a unique opportunity,” said David Simon, CEO of Simon Property Group, the largest mall owner, last week on the company’s quarterly earnings call. “We’re going to redevelop. We’re going to reinvest in the communities. We’re going to be able to drive traffic now from this box.”
In a statement, Conor Flynn, CEO at Kimco Realty Corp, said the bankruptcy “may afford us the long-awaited opportunity to recapture boxes with significant mark-to-market potential in our core markets, and sparks several new redevelopment opportunities within our portfolio.”
With many of Sears’ leases locked in years ago at low rates, rents are also expected to rise considerably for landlords with new tenants. Sears has so far revealed plans to close 142 of its 687 Sears and Kmart doors, on top of 46 already set for closure by November.
On the downside, if Sears liquidates, about 100 million square feet of vacant retail space would hit the market. Many malls are already busy redeveloping or struggling to deal with the exit of other major anchors, such as J.C. Penney, Macy’s, Sears as well as Bon-Ton Stores and its regional chains.
Assuming the landlords can reclaim the leases, they face costly and time-consuming redevelopment. According to CBRE, backfilling a typical department store takes an average of 18 to 36 months and sub-dividing the space to suit multiple tenants typically takes longer.
Moreover, converting the anchors into entertainment-oriented offerings such as restaurants, movie theaters or fitness centers holds no promise of success.
Second-tier shopping centers are particularly at risk. More than 70 percent of Sears stores are in class-B and C malls, according to CBRE. The loss of an anchor tenant could trigger opt-out clauses for smaller tenants.
- Kimco Realty Anticipates Significant Value Creation Opportunities from Sears Holdings Announcement – Kimco/Business Wire
- Sears Will End Up in Liquidation, Say Experts, Proving a Mixed Blessing for Mall Landlords – National Real Estate Investor
- Simon Property Group (SPG) Q3 2018 Results – Earnings Call Transcript – Simon Property Group/Seeking Alpha
- Washington Prime Group Provides Department Store Update – Washington Prime
- Many U.S. mall owners say good riddance to Sears – Reuters
- Sears is dying but America’s largest mall owner argues it’s not all bad – USA Today
- The Slow Death of Sears Is a Crisis for Struggling Malls—and an Opportunity – Bloomberg
- Landlords across America are cheering Sears’ bankruptcy – CNN
Discussion Questions
DISCSUSSION QUESTIONS: Do you see more positives than negatives in Sears’ bankruptcy filing? How should tenants at shopping centers that have a Sears or Kmart anchor handle the situation?
Poll
BrainTrust
Neil Saunders
Managing Director, GlobalData
Kai Clarke
CEO, President- American Retail Consultants
I think the picture is far more mixed than the optimistic headline suggests.
Certainly there are some malls where losing Sears would allow the space to be better utilized. Burlington Mall in Massachusetts, for example, began redeveloping the wing Sears used to be in after it shut earlier this year. Before the closure, some Sears space had already been given to Primark, which is a much more productive tenant.
However, there are other malls where redevelopment will not be worthwhile and Sears’ departure will leave a hole. Paradise Valley Mall in Arizona is an example. It’s already failing and has many voids. I can’t see any retailer wanting the space that Sears leaves (the company has earmarked the store for potential closure as part of the Chapter 11 process).
This pattern will be replicated across the country. Sometimes Sears leaving will be beneficial; other times it will be extremely unhelpful.
I witnessed Primark taking over one half of a Sears space at Danbury Mall in CT over two years ago. It completely changed the dynamics of the mall. I don’t know if it was a net plus for the mall, but several specialty stores remarked at the time that their traffic went down for many weeks following the Primark opening. And I’m sure J.C. Penney and Macy’s have tales to tell about their comps in that scenario. Bottom line is that Sears is dead weight. I have to believe most malls will turn their departure into a net plus for everybody.
That’s interesting. Primark definitely helps to generate footfall for malls, but it is a killer for apparel retailers that have not gotten sharp offers or pricing. Good for creating a competitive dynamic though!
Exactly. My view is that Primark has won the race to the bottom on pricing. So how is the rest of the mall going to respond? Primark is a game changer in any mall they enter.
Sears is turning into the George Bailey of retailers: It’s worth more dead than alive. (And that was arguably Eddie Lampert’s play all along.) A dying Sears anchor in a strong mall absolutely provides an opportunity for the developer to rethink the space with multiple tenants. But it’s not so simple for those B and C malls, because the problems aren’t limited to the Sears end of the mall. Imagine a regional mall with Sears, Bon Ton and J.C. Penney as its anchors — how does it find new tenants for two of its three anchor locations when it wasn’t a strong mall in the first place?
How a mall handles Sears closing stores depends on the mall. Today the economy is booming, and retail traffic is increasing. The shopping centers who have maintained success will welcome a “goodbye” to the Sears dinosaur that has, if anything, been holding that center down. However, for the less fortunate malls already struggling possibly from other store closings, and competition from newer centers nearby, Sears closing stores will only hurt them more. There is no doubt that mall developers still see great potential in shopping centers and many are investing billions of dollars with renovations and new construction. As we move forward on to the next few years and assuming the economy remains sound and traffic levels continue to rise, it will be interesting to see what the “new” shoppers respond to for visiting the mall. Will it be the right mix of stores, the best entertainment experiences, top restaurants or most likely a combination of all three? One thing is for sure; the future for shopping centers remains exciting!
Sears has been moribund for years. Mall operators thrive on customer traffic. With Sears finally closing locations, mall operators have probably been waiting to replace Sears with more vibrant, attractive uses of the space.
Part of this is really about the long-term contracts and renewals for malls (usually between five and 10 years). Sears has been such a long and storied company, they were able to negotiate long duration contracts and low lease rates for many of their properties. Retail is soaring right now, and malls will be happy to find tenants who will pay more — especially as they are always trying to expand and find more revenue sources for their malls. The shuttering of stores opens up mall space to immediate, new, higher price contracts with more attractive retailers instead of long-term lock-in. Other tenants would be pleased to see the possibilities of attracting and catering to new customer bases, especially with the introduction of other types of tenants such as supermarkets and fitness centers — that bring in reliable traffic.
It’s like that one employee you’ve had for years dreading the discussion about them leaving to have them walk in and tell you they quit. I see this as nothing but a win, merchants in wings anchored by Sears should rejoice so long as the mall quickly has a plan to fill the space.
The developers are right. We just did a study on this and what people want to see the most in place of a Sears (or closing Macy’s or J.C. Penney or any anchor) is something to do with food: a food hall, grocery store or even a farmers market. Also high on the list was fitness centers and even co-working spaces. Lots of room for improvement and increased visitation. The sooner the better!
Lampert’s real estate investment trust Seritage Growth Properties showed the benefits of how losing Sears can allow a landlord to prosper. Sears was paying about $4 per square foot for its space on average, but now Seritage is realizing about $17 per square foot from its newest tenants.
Obviously the quality of the property and mall will dictate the rents that are charged, but even dividing up the space and bringing in multiple tenants will get the landlord more money overall. It might not be an immediate return on investment, but it will benefit the landlord in the end.
Losing a tenant, Sears or otherwise, is only beneficial in a tight market, which is not reflective of today’s environment. The majority of leased space will leave the landlord with high up-front costs, loss of cash flow, and a tenuous short and mid-term future. A bird in the hand is worth two in the bush is the saying which comes to mind here. Sears stores with old leases, or low-demand traffic appeal, are still better than no stores at all…
The answer comes in the way the comment was phrased: “opportunity” is code word for “we’re hoping for the best”… good news is always expressed more explicitly.
And for Simon, who being a major player tends to operate more of the “A-list” malls, there may well be an upside (either their Sears are doing well and will remain, or they will be closed and be available to tenants seeking space in [otherwise] successful centers).
But for the many smaller 2nd and 3rd tier centers — where Sears was either the only anchor, or the only one left — life may be reaching its last, slippery steps.