There’s gold in Sears Holdings Corp.’s department stores, although you won’t find it at the jewelry counters.
Look under the rows of Craftsmen tool chests, Kenmore washers, Lee jeans and other goods that cover the floors of its more than 2,400 stores.
It’s real estate that’s generally available—a status that was highlighted last month when Laguna Hills Mall owner Merlone Geier struck a deal to buy the struggling retailer’s roughly 200,000-square-foot leasehold interest at the shopping center, which is in line for a makeover.
Sears’ real estate portfolio—which also includes Kmart stores—stretches throughout the U.S. and Canada. Its presence in Orange County totals about 1.5 million square feet of space that the retailer either owns or leases at malls and other shopping centers scattered throughout Orange County.
And right in the middle of that OC lineup is more than a quarter-million square feet of space at one of the retail industry’s crown jewels: South Coast Plaza.
Neither Sears nor Kmart has shown signs of reversing long slumps that have many observers writing them off as relics of an earlier retail age. It remains to be seen whether Laguna Hills is a harbinger of more OC deals to come.
“Sears is a real estate company,” said Keith Kropfl, senior vice president at Voit Real Estate Services Inc. “The real estate holdings are more valuable than the company itself.”
The retailer began listing its property—a mix of owned and leased space—in 2010 on a website called SHC Realty as the chain sought new revenue sources. In 2013 it established developer Seritage Realty Trust LLC, which says on its website that its specialty is in redevelopment—a nod to some of the more creative uses of Sears space in recent years.
One of the first of those was the 2010, 43,000-square-foot lease of Sears’ South Coast space to fast-fashion retailer Forever 21. Sears still operates a full department store that covers 240,000 square feet at South Coast Plaza, where it also has a 20,000-square-foot Sears Auto Center.
“They’ve been downsizing most of their stores and taking the other half to generate some income,” Kropfl said. “As far as South Coast Plaza, who knows? I just don’t know where Sears is at.”
It’s no easy feat to pin down a value for Sears’ space at South Coast Plaza, which was part of the center’s opening lineup in 1967.
2012 Sale
About the closest comparable deal came in the 2012 sale of 11 Sears sites to Chicago-based General Growth Properties Inc. for $270 million. The Wall Street Journal reported that $230 million of that price tag went for the Sears at the Ala Moana Center in Honolulu. Other reports have pegged the Ala Moana Sears price tag at $200 million to $250 million.
The Honolulu mall brings in more than a $1 billion in sales annually.
South Coast Plaza had about $1.5 billion in sales for the 12 months through June.
Some industry watchers say the Ala Moana store might have been the high-water mark for Sears as it unloads its portfolio.
“It would be close,” said DJ Busch, an analyst at Newport Beach-based real estate research firm Green Street Advisors Inc. “There were a lot of unique circumstances [with Ala Moana]. I don’t know if we’ll see something to that level again. South Coast Plaza would be one of the few close to Ala Moana. It’s one of the—if not the—most dominant malls in the West Coast or even in the country. It drives traffic from all over. So, to the extent that they were able to capture the space that Forever 21 is not using and redevelop it with inline space, I think it could warrant a pretty hefty price tag.”
Better Deals
Busch said that the Forever 21 sublease was likely one of the better Sears deals to be done in the past few years—for South Coast and Sears.
“South Coast is pretty bullet proof,” he said. “There’s no bad area there, but if you had to point to one, it was maybe that Sears entrance into the mall.”
South Coast doesn’t seem to see it that way as it continues to work the angle of offering a shopping experience to the world unlike any other.
“South Coast Plaza offers the best of the best in every retail category and Sears fulfills an important niche for our shoppers,” said South Coast Executive Director of Marketing Debra Gunn Downing in an e-mail. “The arrays of products from tools to home appliances to an auto center [give] important value to our shoppers.”
She said there have been no additional talks with Sears about leasing or selling its remaining space at South Coast Plaza, saying that it has “a rich history” there and “was an original anchor store and it remains an important part of the retail offering.”
Busch guessed that Sears could be generating positive cash flow there or could just be sitting tight and waiting for the right time to strike a deal.
“What we learned from some of the other deals is they take a tremendous amount of time,” he said. “These conversations are quite lengthy.”
Negotiations took a long time for the 24 Hour Fitness sublease of more than 54,000 square feet of former Sears space at the Village at Orange last year, but that’s the norm for the fitness chain, Voit’s Kropfl said. That’s because there are conditional use permits that have to be pulled, amendments to certain conditions or covenants, and more.
But 24 Hour solved a challenge that comes with many Sears spaces: basements.
“A lot of these Sears buildings were built back in the ’50s, or maybe even earlier,” Kropfl said. “They were built with big foundations and slabs separating the floors. The big problem is the basements. No retailer is going to want the basement. Health clubs, however, can utilize the basement. It was a challenge in Orange, but we were able to do it.”
A section of the floor was removed to help bring in natural light.
Vestar
Vestar acquired the Village at Orange on undisclosed terms as part of a joint venture late last year and is planning a major remodel of the property.
Jeff Axtell, Vestar vice president of acquisitions and development, told the Business Journal earlier this year that Vestar hadn’t yet had discussions with Sears about its future at the mall but that Vestar would like to see that location upgraded if possible.
Axtell could not be reached for comment for this story.
Sears spokesperson Howard Riefs declined to say whether the company is in discussions with other mall owners locally.
“We value Sears and Kmart’s presence in Orange County,” Riefs said in an e-mailed statement. “We remain committed to serving our members in the area.”
Others say there’s no doubt discussions are taking place, but it’s complicated.
“That’s a discussion that happens very frequently, but in practice, we’ve seen very few of those deals take place. … Sears has a ton of real estate, but they’re also trying to operate a business, so it’s also about where it falls on their priority,” Busch said. “They’re trying to do a lot of different things.”
