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Mall Owners Attempt to Capitalize on Sears Closures

Following Monday’s bankruptcy filing, Sears announced plans to close 142 stores by year’s end. The timing of these closures means the holidays will be met with either plentiful empty boxes or aggressive liquidation sales. For competitors occupying space at the other end of the affected malls and landlords suddenly facing a flood of new space on the market, the announcement produces more questions than answers.

While widespread closures like this typically result in a boon for some competitors and a bust for others, in the case of Sears, industry watchers say there’s a third, more likely, option.

“Most existing retailers in Sears-occupied malls likely will not see a significant negative impact on store traffic or sales following a closure,” retail services firm CBRE said in a statement. “Sears’ steady performance declines in many malls means it has long ceased to be a key traffic driver, so closure will have minimal impact on co-tenants’ performance.”

Moreover, Mark Hunter, managing director of retail asset services for CBRE, told Sourcing Journal the rival chains that could benefit from the department store’s decline have likely already done so. Among them, he lists Home Depot, Lowe’s, Menard’s, Best Buy, Kohl’s and J.C. Penney.

While Hunter sees continued benefits to JCP, as the only mall-based retailer in the bunch, not everyone is convinced there’s more to be gained at this point.

“Penney’s is sitting in malls that Sears is going to vacate, if they haven’t already, so while they might get some foot traffic for product that Sears carries, they’ll lose foot traffic that the mall represents,” said Mark Cohen, former chief executive at Sears Canada.

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Cohen said Sears’ departure makes Penney’s already precarious state even more so. “Penney’s is on thin ice,” he said.

For commercial property owners operating malls and shopping centers that house these Sears and Kmart locations, the race is on to backfill that space.

In many cases, mall owners have been eyeing these boxes in anticipation of the day when they can replace the low-paying occupants with higher-margin tenants.

Seritage Growth Properties, which was originally formed by Sears, said in a statement Monday that it leases space to more than 100 Sears and Kmart stores. The company ensured investors that it has the cash flow and diversified portfolio to cover “potential disruption in Sears income” as the stores close. Moreover, Seritage estimates it can recover all income associated with those stores by leasing out just 25 to 35 percent of the space once it’s vacant. This illustrates how little the company was making off of Sears rent. Seritage stated  it can typically command between 3.5 and 4.5 times the current rent when Sears space is backfilled.

Similarly, Washington Prime Group, which preemptively released a statement on Friday, touted its efforts to winnow down its department store dependency by half since 2015. Further, the company said it has reduced its exposure to Sears by 78 percent in that same time period. Today, the company has 28 underperforming department stores, including Sears locations. WPG is actively working toward redeveloping 24 of those locations.

Conor Flynn, CEO of Kimco Realty, which operates properties with 14 Sears and Kmart stores, said in a statement Monday that the filing represents a “long-awaited opportunity.” The 11 Kmart and three Sears locations pay an average of $5.25 per square foot compared to the $15.95 rate paid on average by tenants across the company’s portfolio.

For the last three years, Kimco said it has been actively working to get Sears and Kmart boxes back and had successfully re-leased space to off-price stores like Ross and Marshall’s and is in the process of redeveloping properties for use by tenants like fitness centers and drug stores.

“Given the highly favorable demographics of these locations, along with the continued demand for well-located, high-quality real estate, we expect to build on our past success in creating value by re-tenanting and redeveloping these below-market anchor spaces and activating underutilized parking fields,” Flynn said.

In addition to off-price stores, spaces like these are increasingly being snapped up by grocery stores, entertainment destinations and a host of non-traditional tenants. Gavin Bisdee, vice president of global marketing for retail software firm Zynstra, said the bankruptcy also presents fellow department stores opportunities as they push their own omnichannel strategies forward. “Don’t be surprised to see other retailers looking at the Sears real estate inventory for their own sales and distribution needs,” he said.

The holes left behind as Sears contracts could also benefit these stores in the form of cheaper rents, Hunter said. “The additional vacant space on the market with more Sears closures will provide retailers—especially big boxes—greater negotiating power.”

Though most property owners likely have had plans in the works for what they’d ideally like to do once Sears vacates, the reality is the wait is still not over, according to CBRE. While department store spaces can typically be flipped in 18 to 36 months, the company said, “the complexity of the bankruptcy filing will make this less than typical.”

Further, the company estimates only 30 percent of Sears locations are in A malls, meaning 70 percent will be that much more difficult to re-fill. “Stores in major markets and in prime locations will be easier to repurpose than those in secondary and tertiary markets where consumer demand is weaker or has declined in recent years,” CBRE warned.