How Sears’ Bankruptcy Could Affect Retail Rents for Everyone

Throughout Sears’ 125-year history, the retailer played an outsize role in the lives of countless American families, whether they shopped through its catalogs, lived in one of its kit houses or ate out of one of its Kenmore refrigerators. Now, with the company scrambling to reorganize after filing for Chapter 11 bankruptcy on Monday, the futures of retailers and mall owners around the country are bound up with its fate.

According to commercial real estate firm CBRE, the bankruptcy affects an estimated 100 million square feet of owned and leased real estate space, including 380 Sears stores and 342 Kmart locations, prior to planned closings. With mall vacancy rates already nearing double digits — the highest they’ve been since 2012 — another wave of closures could be painful for some landlords and potentially disastrous for others.

About half of all Sears stores are in Class B malls, per CBRE. These regional malls typically serve communities with lower population density and lower incomes than their top-tier peers. Another 20 percent of stores are in Class C malls and below, vulnerable thanks to falling foot traffic and increased competition from rivals that have invested in both their stores and e-commerce. These are the shopping centers that could flounder when an anchor tenant like Sears moves out since they’re less likely to find the luxury gyms, coworking spaces and direct-to-consumer retailers that are eager to move in to the best malls in the country.

Even if they do find tenants to fill the empty space, redeveloping a big-box store is costly and can take years, during which the economic climate could take a turn for the worse. In the meantime, cotenancy clauses could allow neighboring tenants to skip out on their leases, too, further adding to the blight — though fortunately, the retailer’s drawn-out demise gave landlords plenty of time to renegotiate.

Sure, Sears is paying well below market rent on most of its properties: as little as $4 per square foot in some cases, thanks to leases negotiated decades ago — about a fifth of what the average mall tenant pays, according to research by commercial real estate firm JLL. But many owners will find the retailer challenging and costly to replace, and the glut of supply could drive down rents overall, particularly in regions that aren’t in high demand.

One thing’s certain, though: Even if Sears manages a turnaround — and that’s still a major if — it will leave a trail of vacant stores behind it.

BEST GROUP Photo by Angelo Lanza Sponsored By ITA

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