Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)
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Countryside Mall, in Clearwater, Fla.; and adjacent to the Shops at Friendly Center, in Greensboro, N.C. Sears also struck a deal with Forever 21 for 43,000 square feet of its store at South Coast Plaza, in Costa Mesa, Calif. In strong markets like Southern Cali- fornia, Sears holds a strong position. In fact, several deals Hammond tried to forge with the retailer there cratered "because Sears didn't want to give up a space when they're paying incredibly low rents on long-term leases," he said. One high-profile grocery chain was willing to pay market rent to sublease a Southern California location, but Sears declined, choosing instead to continue paying rent that is one-third of the market average, noted Hammond. Sears has also been re- luctant to offer the tenant-improvement dollars that today's more-viable replace- ment tenants such as gyms and health care users would need to make deals work, he says. Malls that have managed to pry prime leases out of Sears' hands an- ticipate significant upside. Sears sold its stake in the former Laguna Hills Mall in 2014 to Merlone Geier Partners, which had bought the other portion of the 40-year-old mall from Simon the previ- ous year for renovation. The depart- ment store's leasehold was tying up 15 acres of the 68-acre property, and when Merlone Geier finally nabbed that, it shifted gears to build what project man- ager Jeremy Meredith calls a "prome- nade-style urban village." Sears Holdings announced in No- vember that it would do some rede- veloping of its own on its 12 acres at Florida's Aventura Mall, transforming that into an open-air village with restau- rants, 40,000 square feet of offices and a 20,000-square-foot small-format Sears, plus other new retail. Nordstrom, too, has emerged as a player in the Sears scramble, saying it will open a three-level, 213,000-square-foot, full-line department store by the fall of 2016 in a vacant Sears space at Toronto Eaton Centre. A former 130,000-square- foot Sears space at an 'A' site in The Woodlands Mall, north of Houston, opened last September. Sears has some incredible real estate in its remaining Texas portfolio, says Ian Pierce, a spokes- man for the Dallas-based Weitzman Group. The remaining Sears stores in major Texas markets are mainly in good- performing malls, Pierce says. But carving up Sears stores into smaller spaces can present a chal- lenge, given their two-story heights and 130,000 square-foot expanses, says Ham- mond. Some have already been effec- tively subdivided to accommodate the trio of Dick's Sporting Goods, Forever 21 and Nordstrom Rack. "The key is to be able to repurpose the spaces in a stra- tegic manner," Hammond said. By con- trast, the retailer's portfolio of former Sears Auto Center shops, which typically measure about 11,000 square feet, is be- ing marketed as dividable into 2,000-to- 5,000-square-foot spaces, he says. The Kmart portion of the portfolio is a different story. That real estate is largely strip-center-based, with some ag- ing stand-alones, says Hammond. "For those, it always comes down to location, location, location," he said. "There's a flight to quality in the box arena, and if a Kmart is located in an 'A' trade area, you'll find a selection of tenants ready to fill the space or 'demise' it for a re- placement tenant." In September the city of San Clemente, Calif., confirmed that three concepts — Sports Author- ity, Sprouts Farmers Market and Stein Mart — will take over a Kmart that closed in 2013 in a prime Interstate 5 location near Capistrano Beach. Alan Shaw, Sears Holdings' vice president of real estate, development and leasing, says there continues to be demand across the company's portfolio for 'B' and 'C' mall spaces, including Whole Foods and Kroger, and for its 'B' and 'C' shopping plaza sites, which are primarily Kmart sites, for such tenants as Aldi, HomeGoods, Sports Authority and Ulta. Many older vacant Kmarts in such secondary locations have already been transformed into churches, com- munity buildings, call centers and value- retail hubs, among other uses, says Jim Bieri, co-principal of Detroit-based Sto- kas Bieri Real Estate. Though the likes of T.J.Maxx are perfect candidates to take over many of Sears Holdings' vacating Kmart stores, retrofitting them is not always easy, Bieri says. Finding desirable retail replacements for former Kmarts in exurban locations can be especially chal- lenging, he says, given today's consumer preference for urban-village stores. Other heirs apparent for closed Sears stores are category killers like H&M;, Uniqlo and Zara, Bieri says. Among the hurdles in taking over full mall floors: rerouting utilities, removing escalators, dividing up parking space and reworking the operating agree- ments to assure the new tenants have direct access to their malls, he says. One broker who is familiar with Sears and Kmart subleases but who requested anonymity says that malls typically r e t a i l i n g t o d a y F e b r u a r y 2 0 1 5 / S C t 25 Carving up Sears stores into smaller spaces can present a challenge, given their two-story heights and 130,000-square-foot expanses.