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Luxe Deal: South Coast Plaza Buys Out Sears

The owners of South Coast Plaza have bought back a large chunk of property at the Costa Mesa shopping center from department store operator Sears Holdings Corp., the Business Journal has learned.

The purchase paves the way for potential major redevelopment at Southern California’s most valuable retail center.

An affiliate of South Coast Plaza recently completed the buy of several properties at the mall from Sears, the troubled Hoffman Estates, Ill.-based retail giant that’s a legacy anchor at the 2.7-million-square-foot center.

The late Henry Segerstrom, whose C.J. Segerstrom & Sons opened South Coast Plaza in 1967, famously sold land at the center to Sears for $1 to entice it to build its store there.

The recent deal, which property records show closed around the start of the month, comes at a much higher price.

S-Tract LLC, a newly formed entity that state records show to be affiliated with C.J. Segerstrom & Sons, paid about $187 million for Sears’ collection of buildings at the mall, based on a reading of property records.

Sears operates a roughly 240,000-square-foot store there, and leases out another 43,000 square feet in its main building to fast-fashion retailer Forever 21.

Factoring in other smaller sites at the mall that Sears owned, including a Sears Auto Center and a restaurant site, the retailer’s holdings at South Coast Plaza are believed to have been a little more than 300,000 square feet.

A sale of all those properties equates to a nearly $600 per square foot price. That’s well on the high side for an area retail property but not as expensive as other larger recent transactions in Orange County involving newly built shopping centers, one of which—the sale of a majority stake in Huntington Beach’s Pacific City center last year—topped the $900 per square foot mark.

Multitenant retail buildings of any size in OC now sell on average for a little more than $400 per square foot, according to data from brokerage Marcus & Millichap.

S-Tract also assumed a ground lease from Sears for the related properties as part of the deal, according to property records. The term runs into early 2026.

Crown Jewel

The location was one of the most valuable remaining assets—real estate or otherwise—of Sears, which has a market value of about $925 million and has been shedding locations at a rapid rate amid a cash crunch and looming debt issues.

Sears said in a news release this month that it recently “closed on over $200 million of real estate transactions,” but didn’t specify South Coast Plaza or any other assets that it sold. The retailer said it used proceeds from the sales to pay down debt.

The company has announced plans to close nearly 200 of its namesake department stores and Kmart locations this year in order to cut costs and square footage. It operated 1,430 full-line and specialty retail stores as of this year, according to regulatory filings.

Since last year, Sears has sold 2.8 million square feet worth of its stores at an average price running slightly under $100 per square foot, according to industry data. That doesn’t include the South Coast Plaza property.

The company hasn’t announced plans to shutter or downsize its operations at South Coast Plaza, and terms of any lease it signed with the mall have not been disclosed.

Mall representatives, reached for comment late last week, said South Coast Plaza “now owns the parcel of land and the buildings and Sears will operate the retail location as a tenant of the shopping center.”

“South Coast Plaza and Sears have enjoyed a long and productive partnership for 50 years,” said Debra Gunn Downing, spokeswoman for the shopping center. “We look forward to continuing that relationship with Sears and the many customers it serves through the South Coast Plaza location.”

The shopping center hasn’t announced any forthcoming plans for redeveloping the retailer’s sites, and there have been no proposals filed with the city of Costa Mesa to undertake a redevelopment project.

$1.7 Billion

South Coast Plaza brings in nearly $1.7 billion in sales annually, more than twice the amount of any other OC shopping center, according to Business Journal data.

Its collection of high-end designer boutiques, jewelers and other luxe retailers are the envy of the shopping center industry, a sector that’s been hard hit by the continued loss of larger department store anchors.

Other area malls where department store sites have been bought out by the mall’s owner in recent months include the former Nordstrom at Santa Ana’s MainPlace Mall, and the Macy’s site at the Five Lagunas Mall in Laguna Hills, which is being redeveloped.

Those two properties sold for less than $110 per square foot, according to property records.

A redevelopment of South Coast Plaza’s Sears site into an area featuring smaller tenants, along the lines of what Irvine Co. is doing at the former Macy’s location at Irvine Spectrum Center, would appear to be a likely outcome.

A smaller batch of tenants would likely deliver much more rent in aggregate than merely replacing Sears with a different single department store.

Another likely outcome: The deal will be a moneymaker for South Coast Plaza’s owners.

“It’s very hard to come across an example where someone acquired real estate from Sears and did not succeed after redeveloping the location for higher and better use,” said Bruce Berkowitz, an equity fund manager whose Fairholme Capital Management is one of the largest shareholders in Sears.

Fairholme has been increasing its stake in Sears this year under the belief that the company’s real estate assets aren’t fully taken into account when valuing its depressed stock price.

Sears stock has fallen more than 90% over the past decade.

“Most of the recent store closures are not the company’s most valuable real estate,” said Berkowitz, speaking in late June on his company’s latest quarterly call with analysts.

The Costa Mesa property has “significant value,” he said. n

— Reporter Mediha DiMartino contributed to the story.

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Mark Mueller
Mark Mueller
Mark is the Editor-in-Chief of the Orange County Business Journal, one of the premier regional business newspapers in the country. He’s the fifth person to hold the editor’s position in the paper’s long history. He oversees a staff of about 15 people. The OCBJ is considered a must-read for area business executives. The print edition of the paper is the primary source of local news for most of the Business Journal’s subscribers, which includes most of OC’s major corporate and community players. Mark’s been with the paper since 2005, and long served as the real estate reporter for the paper, breaking hundreds of commercial and residential real estate stories. He took on the editor’s position in 2018.
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