Now the fun begins for the retail and real estate industry across the country.
With the closure of all Sears Canada stores as of Sunday, a vast wasteland of empty space is now open in shopping centres across the country and in standalone structures.
But for the retail sector, like in life, when one door closes, a window of opportunity opens. And that’s how the industry is looking at the closure of what was a formerly iconic retail brand across Canada.
Peter Morris, CEO of Greenstead Consulting Group based in Victoria, said at one point in time Sears had 190 stores (of varying sizes) and well over 15,000 employees. The last store closures will result in millions of square feet becoming available on the market.
“There’s a tremendous opportunity depending upon where the space is located on one end of the scale,” said Morris. “The other end of the scale there’s going to be long-term pain in certain locations and for certain communities.”
Morris said he knows of some Sears locations where they were paying 50 cents per square foot because they were very old leases. But landlords of those spaces are now in a prime position to be able to re-purpose that space.
“Keep it retail. Make it service. Make it institutional such as libraries. And get an uplift on the rent and actually re-position the property,” said Morris. “A lot of people considered Sears to be an anchor and that was very, very true while Sears was in its heyday but frankly Sears stopped drawing traffic many years ago as witnessed by its demise. Those well-located Sears stores will be very quickly re-purposed.”
But there are also many former Sears stores that were standalone buildings. Morris said those are also ripe for redevelopment opportunities into mixed-use or condo use by either being torn down or re-purposed from the inside out.
“The ones that are going to be hurt however is unfortunately where Sears was strongest at the end of its life,” explained Morris. “That is in rural communities. Because in rural communities Sears was the general store of old. We saw the demise of department stores coming back in the 1970s, 1980s with the rise of the specialty store chains. Prior that, department stores ruled the roost and it was specialty stores, mom and pop, independent stores, that you found downtown and on main street. The department stores had the branding, the advertising power and the purchasing power to fill their stores with a selection.”
“But once those specialty stores came along we started to see sales in department stores peter out. After that came the big box stores – the Best Buys of the world and stores like that – and that started to cause the demise of a lot of specialty stores too. Where Sears did well in rural markets was because the specialty stores couldn’t operate efficiently in those markets. They were too small to meet the needs that they had for their bottom line for their investors . . . And the big box stores obviously can’t operate in a small rural catchment area for the same reason because they need to get those economies of scale.”
So it’s going to be hard to backfill those former Sears spaces in smaller communities.
“It’s a tale of two geographies. Urban versus rural,” said Morris.
“It’s a little early. There’s going to be a lot of planning. It’s safe to say there aren’t any 150,000-square-foot users to take up so many stores. They’re going to have to re-demise that space. But shopping centres themselves are going through a transition. If Sears was in a prominent shopping centre, they have no problems chopping that space up into smaller spaces, commanding very high dollar value and the owners of those properties are going to be very, very satisfied.”
Secondary properties, though, will have to be more creative with that space, he said, and generally in shopping centres a revolution is taking place anyway with more food, more entertainment and more uses that were primarily in the past standalone locations such as gyms and offices.
“So anything that requires physical interaction which is what we’re now seeing in shopping centres,” said Morris.
Michael Kehoe, an Alberta-based retail specialist with Fairfield Commercial Real Estate Inc., in Calgary, said the departure of the Sears department stores may trigger co-tenancy provisions in major tenant leases across the country.
“A co-tenancy provision in a lease may be granted to an anchor or significant shopping centre tenant whereby should an important tenant leave the shopping centre the tenant with the co-tenancy provision in their lease may be entitled to close or have a reduced rent should the anchor or significant tenant space not be re-leased/replaced within a specific time period and in a certain manner such as replaced with retail use,” said Kehoe.
“The uncertainty caused by an anchor store closure can be amplified when the other major tenants in a shopping centre may have an opportunity to depart or reduce their rent thereby further weakening the image and appeal of the property.
It is essential that shopping centre landlords re-lease or redevelop vacant department store space is a timely and effective manner.”
Morris said co-tenancy is not in every lease and it’s not widespread but it is definitely a concept that is negotiated in by some strong tenants.
“It is a protective measure that strong tenants put into their leases,” said Morris.
“The problem for some landlords will be, and they’re evaluating this now I am sure, a cascading effect whereby you have a tenant that can leave because the anchor has left and they exercise that option to leave and then another tenant has their co-tenancy tied to the tenant that’s about to leave because Sears left and another tenant has their co-tenancy based upon the total amount of space occupied in the property and now that’s been triggered and they leave. And then there’s another co-tenancy and it just goes on and on. It becomes a self-fulfilling prophecy.”