Calculating the Impact of Sears Bankruptcy on Retail Real Estate Markets

Sears Holdings Corp. officially filed for chapter 11 bankruptcy protection on Monday, and while that news wasn’t entirely unexpected, clearly there’s much more at stake beyond an iconic American retailer’s fight for survival. There’s significant impacts for the retail sector to consider, as well as the overall commercial real estate industry.
A report by CBRE shows the bankruptcy affects roughly 380 Sears stores and 342 Kmart locations (prior to closings) across the U.S., Puerto Rico, and Virgin Islands, totaling an estimated 100 million square feet of owned and leased real estate.

Sears, which lined up $1.875 billion in bankruptcy financing for existing loans and to fund stores during bankruptcy, believes it can reorganize around roughly 300 profitable stores. Still, the retailer indicated it plans to close 142 stores, leaving it with roughly 580 stores.
CBRE’s Global Head of Retail Research Melina Cordero says, “While this event long has been anticipated, backfilling department-store real estate always is challenging. Sears’ bankruptcy will hasten the evolution of many malls into centers with a bit less retail but more of other uses such as apartments, hotels, restaurants, offices, distribution and entertainment.”

Perhaps, that’s where the silver lining may be revealed in the opportunities that savvy mall owners uncover. CBRE notes mall owners have anticipated Sears’ potential closure for several years, and have made contingency plans that could mitigate the increased supply of available space.
In fact, Kimco Realty Corp. indicates that it expects to benefit from considerable mark-to-market and long-term redevelopment opportunities as a result of Sears’ bankruptcy filing.

Kimco’s Conor Flynn says, “Today’s announcement 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. 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.”

CBRE notes the bankruptcy process considerations include:
• ESL Investments’ initial bid for “a large portion” of Sears’ stores likely to be required to go through auction process.
• Ramifications of Sears closures for co-tenancy, or “kickout” clauses, is anticipated to be minimal.
• Mall or strip center owners facing the imminent shuttering of a Sears or Kmart face a protracted recovery process. It often takes 18 to 36 months to backfill a typical department store, but the complexity of this bankruptcy filing will make this less than typical.
• The vast majority of Sears stores (>87% of boxes) are in regional malls.
• Most Kmart stores are in strip centers or stand-alone locations.
• Possibilities for replacement tenants include clusters of retailers or restaurants, apartments, hotels, entertainment venues and nontraditional mall retailers such as grocers, health-care providers and educational users.

reprint from Connect Commercial Real Estate