A question mark still hangs over the future of Sears Holdings — operator of 687 Sears and Kmart stores across the country — thanks to a last-ditch bid to prevent the bankrupt chain from liquidating outright. But landlords are taking the prospect of its demise in stride.
Quoting anonymous sources with knowledge of the deal, Reuters on Wednesday reported that Sears Holdings Chairman Eddie Lampert had met the deadline to submit a new bid, $5 billion, to save the chain. Lampert’s previous bid of $4.4 billion, rejected by Sears Holdings, aimed to preserve about 425 Sears and Kmart stores; through the new bid, he reportedly aims to raise that number to 482.
By submitting a $120 million deposit on Wednesday afternoon, Reuters reported, the hedge fund Lampert operates gained the right to compete against major liquidation firms in an auction for Sears Holdings’ assets that is scheduled for Jan. 14.
It could be weeks before Sears Holdings announces whether Lampert’s hedge fund or the liquidation firms gunning to dispose of the chain have prevailed. Even so, many in the shopping center industry put long odds on the possibility of Sears’ ultimate survival. Should the chain liquidate in the end, they say, it would hardly be a surprise.
Major U.S. landlords have been anticipating and preparing for such an end to the 126-year-old chain for years now, notes David Bujnicki, senior vice president of investor relations and strategy at Kimco Realty Corp. “Most retail landlords have been fully aware of the Sears-Kmart situation and have had ample time to prepare,” he said. “Most of us have already put together plans on how to proceed if it moves to a liquidation.” Top landlords know the best candidates for repurposing these spaces and are well aware of which locations will be viable for redevelopment projects crafted to ramp up rents and overall returns, he says.
Over the years, Kimco, for one, has proactively moved to reduce its exposure to Sears and Kmart stores. “Our Sears-Kmart exposure is really at the de minimis level of 14 locations,” Bujnicki said. “At one time, they were our largest tenant, but now they are not anywhere near our top 25.”
Moreover, major REITs have spent years shedding properties in secondary and tertiary markets and pursuing major-market strategies. That means the Sears and Kmart stores in their portfolios tend to be in high-demand areas — front runners for rapid and relatively easy replacement, Bujnicki says. Obtaining market rents for these locations is often a welcome development for these companies. “Our Sears-Kmart boxes are our lowest-rent-paying anchor tenants in our entire portfolio,” Bujnicki said.
Over the past three years, Woodland Hills, Calif.–based NewMark Merrill Cos. has repurposed a total of four Sears or Kmart stores. In each case, this has been a boon, according to Chairman, President and CEO Sandy Sigal. The private company develops, owns and manages shopping centers in California, Colorado and Illinois, with a portfolio comprising nearly 80 properties. In Anaheim, Calif., the combination of Five Below, Ross Dress for Less and Target replaced a Kmart space. In San Diego County, Target replaced the entirety of the Kmart building — tripling traffic to its side of the building, according to Sigal. In Thousand Oaks, Calif., Dave & Busters, DSW and Nordstrom Rack replaced a Sears that dated back to the 1950s. And in Chicago NewMark Merrill is now replacing another Kmart store with a soft-goods retailer. NewMark Merrill exposure to Sears-Kmart vacancies is zero as a result of these moves, Sigal says.
“In the right locations, a Sears or Kmart vacancy means you are picking up more rent, from an economic perspective, but certainly you are picking up a much better co-anchor for your shopping center than what we’ve had over the past few years with Sears and Kmart,” Sigal said.
None of this is to suggest that the liquidation of such a major retail tenant would be painless for the shopping center industry.
Adam Ifshin, CEO of New York City–based DLC Management Corp., which owns, develops and manages open-air shopping centers across the country, points to the ripple effects of 687 stores hitting the market all at once. Across the industry, he says, the consensus is that Sears has failed to keep pace with the evolution of retail and is likely to disappear as a result. Still, Lampert’s last-ditch bid, should it prevail at auction, could at least succeed in slowing the demise of the chain, thereby giving landlords more time to dispose of or repurpose these boxes. “If you are a large Sears landlord, you would prefer that the space come back in an orderly manner, as opposed to being flooded onto the market at one time,” Ifshin said.
Over the past few years, DLC has eliminated its exposure to both Sears and Kmart. “I took my exposure down either by selling it out or recapturing Kmarts and repurposing them into things like T.J.Maxx, Dick’s Sporting Goods and Aldi and our other value tenants,” Ifshin said. “All told, we have done about half a dozen of them.” Over the long term, the U.S. retail industry will benefit from the “creative destruction” of this classic American tenant should it liquidate as predicted, Ifshin says. “In capitalism, creative destruction is painful, but it is necessary,” he said. “This is an old, obsolete retailer that has nothing to offer the communities in which it exists and the consumers it claims to serve.”
Sears, which has closed hundreds of Sears and Kmart stores over the past couple of years, reportedly employed 68,000 people at the time of its bankruptcy declaration this past October. In the event of a liquidation, those employees will at least be looking for new jobs at a time of historically low unemployment and strong demand for the right people, Ifshin notes. “Lots of our retailer clients are telling us ‘Hey, we need people with retail experience who want those types of jobs,’ ” he said.
But if hundreds of additional Sears and Kmart stores go dark, the consumer perception of fire-sale prices at these going-out-of-business events could siphon sales from other chains, at least for a time, Ifshin says. “The likes of Kohl’s, JCPenney and Macy’s would suffer to some extent, with negative pressure on their comp-store sales,” he said. “But in the long run, they should all be prime beneficiaries of the consolidation in the department-store sector overall.”
On the real estate front, meanwhile, landlords with properties in lackluster markets would hardly see the demise of Sears as a cause for celebration.
“If you’ve got a class-A mall that still has a Sears, you’re in a good spot,” Ifshin said. “Yes, you’ll have to apply capital and figure out how to merchandise it. Maybe you cut it up, knock it down or get a zoning change to do apartments over retail. If you have a class-C mall, however, it’s a different story. There may not be a taker for that space.”
An important consideration for landlords, Ifshin adds, is the potential expense and logistical difficulty of backfilling large-format boxes. “Some of these users that are going in, like gyms, movie theaters and experiential tenants, require a lot of work,” Ifshin said. “Not everybody can take a one-level, 85,000-foot Sears and make it a Dick’s Sporting Goods and a Burlington. There isn’t unlimited demand. In the end, real estate is always about location.”
Indeed, as Sigal summarized it: “You can always change the tenant; you cannot change the location.”
Contributor, Shopping Centers Today