The Wall Street Journal
By Esther Fung Oct. 12, 2018 7:00 a.m. ET

Profitable shopping centers see chance to lure higher-paying tenants even as heartland fears losses

The prospect of Sears Holding Corp.’s imminent bankruptcy threatens to widen the gap between the more successful shopping centers and the struggling ones.

Mall owners with trendy retailers, lively restaurants and other forms of popular entertainment have continued to prosper. Many of these landlords would welcome Sears’ departure, mall owners and analysts said. The department store’s exit would allow them to take over a big-box space and lease it to a more profitable tenant.

In malls where leases were signed decades ago, Sears rents could be as low as $4 a square foot. New tenants in the same space could bring as much as six times that amount.

But for mall landlords in more economically depressed areas, where there is often still a glut of run-of-the-mill retail and much of the former foot traffic has migrated to online shopping, the loss of Sears as anchor tenant could be troubling. The brand still attracts some consumers, and many owners would be hard-pressed to find another large tenant to take Sears’ place.

Several other department stores, like J.C. Penney Co. and Macy’s Inc., have been closing weaker locations and aren’t eager to lease space in floundering malls, while a number of other chains, like Toys ’R’ Us Inc. and Bon-Ton Stores, that once occupied big-box spaces are out of business.

“The top 50 mall owners in the country were dying to get Sears out of the mall, so they’re thrilled,” said Corey Bialow, chief executive at Bialow Real Estate LLC, a firm that represents retail tenants. “Where it’s going to hurt most [is] at malls that are already struggling. Losing Sears could hurt foot traffic in places where customers don’t have access to Nordstrom. Sears is still a relevant brand in the heartland, and closures there will inevitably hurt.”

Either way, mall owners seem prepared for Sears to go. Sears has hired M-III Partners, a boutique advisory firm, to prepare a bankruptcy filing. The company, which had 866 Sears and Kmart stores as of Aug. 4, has been unprofitable for seven straight years and has closed hundreds of locations.

As of Oct. 1, the company operated 380 full-line Sears stores, less than half of the 919 it ran in August 2008, according to AggData.com, a provider of location data. Kmart has shrunk even more dramatically: Just 360 were open in mid-July, down from 1,498 a decade ago.

Some of Sears’ biggest lenders are pushing for the troubled retailer to liquidate rather than try to reorganize through the bankruptcy process, The Wall Street Journal reported on Thursday. Yet even if the department store and its controlling shareholder and Chief Executive Edward Lampert pursue a restructuring plan to keep the brand alive, that could still lead to hundreds of Sears stores closing.

Many property owners have anticipated this kind of shake-up and have already made contingency plans for their Sears department stores, auto centers and Kmart stores, which are also owned by the holding company.

In Yonkers, N.Y., the owner of Cross County Shopping Center, which has leased a three-story, 250,000-square-foot building to Sears for about 40 years, doesn’t see its exit as cause for concern.

The center is currently 98% leased and sees a healthy amount of foot traffic, said Craig Deitelzweig, chief executive officer of Marx Realty, which owns the open-air center with Benenson Capital.

By providing a Fourth of July fireworks show, sponsoring family days with inflatable bounce houses for children, and adding new restaurants like Shake Shack and Jamba Juice, the shopping center has remained engaged with the community, Mr. Deitelzweig said.

“We aren’t worried about whether the space can be backfilled,” he added. “We can accommodate not just Sears, but any other tenant that may go under.”

But there are hundreds of malls and open-air shopping centers across the U.S. that have a wave of vacant space coming due and will face new leasing challenges if their anchor tenant closes its doors.

“It becomes an additional burden on a center that is trying to repair itself because it’s one more issue that they have to rectify,” said Neill Kelly, a senior vice president at CBRE focused on retail restructuring.

For some hard-hit malls, Sears’ exit wouldn’t even be the first department store to fail this year. The Chicago Ridge Mall lost its Carson’s store after the chain’s parent, Bon-Ton, filed for bankruptcy and new owners liquidated all 267 stores. The shopping center also has a Sears.

A spokeswoman for Starwood Retail Partners, the mall’s owner, said the company is working on ideas for the space that Carson’s used to occupy but declined to comment on Sears.

Real-estate investment trusts sold off after The Wall Street Journal reported late Tuesday that Sears was preparing for chapter 11, and amid a broader market selloff. The FTSE Nareit Equity Retail index fell 3.6% since Tuesday’s close, and Washington Prime Group and CBL & Associates Properties Inc. were among the REITs that declined, falling 4.1% and 3.7%, respectively, since Tuesday’s close.

Simon Property Group, the biggest shopping mall owner in the U.S., has the most Sears stores with 59, while Washington Prime Group has 42 stores, according to data from Wells Fargo Securities and SNL REIT Datasource. Washington Prime is managing its Sears exposure and has redevelopment plans for a number of the stores, a spokeswoman for the company said. CBL & Associates started the year with 40 stores, but said it expects to be at 28 by the year-end.

But in each case, rent from Sears represents less than 1% of these mall owners’ overall revenue, according to Wells Fargo Securities and SNL. This helps mitigate some of the financial impact, but a Sears departure could still have a negative impact.

For instance, if the landlord is unable to find a replacement tenant, a so-called cotenancy clause would allow other mall tenants to seek rent reductions or lease terminations.

A Sears liquidation would also pose problems for holders of debt that is backed by malls where the retailer operates. More than $10.6 billion worth of loans that were converted into commercial-mortgage-backed securities that financed retail properties. These properties count a Sears or Kmart among their top five tenants, according to data firm Trepp LLC.

The lower the quality of the mall, the higher the risk, according to a Trepp report issued Thursday. Still, a liquidation “would not be the death knell” for all these malls, partly because many of the poorest-performing Sears stores have already been closed.

—Peter Grant contributed to this article.
Write to Esther Fung at esther.fung@wsj.com