Malls May Feel Pain for Years

Daily Herald (Arlington Heights, IL), October 16, 2018 | Go to article overview

Malls May Feel Pain for Years


Byline: Patrick Clark and Lily Katz Bloomberg

As Sears Holdings Corp. goes through bankruptcy, retail landlords wondering how they could be impacted might want to look at a 2015 deal.

Mall owner Macerich Co. struck a agreement that year with the struggling department-store operator to redevelop a 300,000 square-foot store at Kings Plaza Shopping Center, a high-traffic mall in the New York city borough of Brooklyn. Three years and $100 million later, Macerich finished work on the space, which has been subdivided and leased to Burlington, J.C. Penney, Primark and Zara.

After Sears filed for Chapter 11 protection early Monday, Macerich's lengthy -- and expensive -- process is worth keeping in mind. Other mall owners, who have been grappling with the retailer's store closings and diminished ability to attract shoppers for years, must now contend with the possibility of a full liquidation, which would mean a glut of retail real estate in an already oversupplied market. For now, a majority of stores will continue to operate.

"Landlords may not have direct exposure to Sears, but we see this wave of supply potentially impacting market rents," SunTrust Robinson Humphrey Inc. analyst Ki Bin Kim wrote in a note to clients. The bankruptcy could create more than 100 million square feet of space, he estimated.

At the end of 2017, about 80 percent of Sears-branded stores were in regional malls, according to an estimate from Wells Fargo analyst Jeffrey Donnelly. Some of these are performing better than others, and owners of higher-quality malls, for example, will probably see the bankruptcy as good news, since the space could potentially be redeployed to tenants who pay top rents and attract more foot traffic.

Sears anchor boxes pay around $5 per square foot in rent, while the average rent for top-quality malls is closer to $50 or $60 per square foot, said Bloomberg Intelligence analyst Lindsay Dutch. But timing is a key factor.

"You're going to have to take the time to fill the box, which is going to take at least a year and a half, and you have to find the right tenant to go in there," Dutch said. "It is an opportunity to raise rent. I think all of them closing at once is obviously going to be a lot harder to handle than a few here and there."

Investors seem to be buying the rent argument, or at least, they saw a Sears bankruptcy coming and priced it into the valuations of real estate investment trusts that own malls. …

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