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Out with the Old, In With the New as Malls Pivot From Sears

As the Sears Holdings saga has unfolded, mall and shopping center owners have been busy rewriting a script in which they could have been cast as the victims. Rather than fall prey to the Oct. 15 bankruptcy—and the probable demise—of these storied retailers however, these companies have opted for a choose-your-own-ending type tale that depicts them as protagonists—so much so that the subtext of many of the third-quarter earnings calls has been good riddance to Sears and all other former anchors that haven’t kept up with the times.

That’s not to say they’re not sympathetic—and even in some cases somewhat nostalgic—about the state of the Sears and Kmart chains. But it’s clear the real estate C-suite is ready to move onto the next chapter.

“We’ve gone through a point where the legacy retailers that have not invested in the store and not put the customer really as a focal point, those are the boxes that are coming back to us,” said CEO Conor Flynn of real estate investment trust Kimco Realty. “And what we continue to focus on, whether it’s the Toys’ boxes or the Kmart boxes, we look at it as an opportunity.”

Kimco, which owns interest in 450 open-air shopping centers across the U.S., has 14 boxes occupied by Sears and Kmart stores, which Flynn said are “significantly below market.”

The economics of anchor retailers is one reason why landlords are eager to get these locations back.

Acadia Realty Trust CEO and President Ken Bernstein is particularly keen to redevelop one of the three Kmart locations left in its core portfolio. The box, which is “jogging distance from Scarsdale,” is one the company has been wanting to recapture for years. “When we do, the rent will double, triple, quadruple depending on who we split it for, whether we split it, what it looks like,” Bernstein said.

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At one time, anchors paid pennies to take up residence in malls and shopping centers across the country because landlords were anxious to capitalize on the foot traffic these once-dominant retailers drew. But times have changed.

In retrospect, David Simon, chairman and CEO of Simon Property Group, now questions why there were ever so many department stores in the first place. “We don’t need all of those. We don’t really get much of an economic benefit from those boxes,” he said, adding they also aren’t the draw they once were. “We’ve taken over driving the traffic to the center from those boxes as that would have been the historical reason to have them.”

Simon Property, which operates locations across 37 states, Puerto Rico and internationally, including 107 malls and 68 premium outlets, currently has 29 Sears stores that are still operational. Another 33 Sears stores have closed or are slated to do so by year’s end. Of that group, the company controls 17 locations, which will be redeveloped, re-leased or torn down this year. Or as Simon put it, “We’re putting Sears in our rearview mirror.”

To do so, Simon Property is re-tenanting and redeveloping big boxes like these to create the kind of traffic and sales that had long since fallen off from its current tenants. Through redevelopments that bring in hotels, office space plus retail, Simon Property’s President and COO Richard Sokolov anticipates triple the retail sales.

“The one unambiguous result of replacing these anchors is there’s no doubt that our total sales and total footfall at our properties is increasing,” Sokolov said. “So in every instance what we’re adding is going to be more productive and more dynamic than what we’re replacing.”

In addition to the future-facing plans of what today’s Sears and Kmart locations will become, mall and shopping center owners had already been insulating against what many felt was the inevitable end for the chains.

SITE Centers, the former DDR Corp., has been busy winnowing its open-air shopping center portfolio down to just the best performing properties, which in and of itself meant the company’s exposure to the Sears bankruptcy was minimal.

“I think all of us for years now have been thinking about what happens when this inventory comes back to the market. Since it’s no surprise, you can imagine us curating a portfolio down to what we think are dominant assets. We ended up with properties that are buried in very wealthy communities. Rarely does that include a Sears or Kmart. They tend to be a bit more mid-market,” explained David Lukes, president and CEO of the real estate investment trust.

SITE said it is filling its last Kmart location with a Lucky supermarket. Similarly, all former Toys R Us spaces have been spoken for thanks to what EVP and COO Mike Makinen characterized as “very, very active demand” for the space.

Washington Prime Group is currently in the process of redeveloping 24 of 28 open department store spaces, a process the company said will take three to five years and between $300 million and $325 million. In addition to that investment, WPG anticipates taking a hit totaling as much as $7 million to $8 million in FY 2019 as a result of co-tenancy clauses, which give tenants an out if major retailers vacate the properties.

Even with these ramifications, CEO and director Louis Conforti is upbeat about WPG’s long-term prospects.

“Don’t get me wrong, while losing a tenant—even a lackluster one—it’s a pain in the behind, we’ve prepared ourselves financially and operationally,” Conforti said. “And now we’re in a position to reap the rewards of replacing these department stores with—heaven forbid—things that people actually want, therein lies the opportunity.”