The reinvention of several former Sears Holdings Corp. stores in Los Angeles County was well underway by the time the Hoffman Estates, Ill.-based retailer filed for Chapter 11 bankruptcy Oct. 15.
Most of the properties held little more than a memory of Sears, or its discount Kmart offshoot, with stores closed and land sold in recent years as the company attempted to stave off insolvency.
Many of the mostly empty storefronts might be monuments to Sears’ failing brand – if not the greater collapse of brick-and-mortar retailing.
But they also represent opportunity.
“You never want to see a company filing Chapter 11, but I would say from the real estate owners’ perspective, it will unlock a lot of opportunity,” said Stenn Parton, chief retail officer of San Jose-based DJM Capital Partners, a real estate investment firm. “You’re going to start to see more movement in developing these former big box retail spaces that have been on hold due to the leases they had.”
Since 2015, at least seven Sears and Kmart stores have closed or are in the process of closing. One of those properties is the historic Sears building at 302 Colorado Ave. in Santa Monica, which was purchased by New York-based Seritage Growth Properties in July 2015 as part of a $2.3 billion portfolio deal that netted the investment firm 235 stores.
Seritage was created in 2015 by Edward Lampert, Sears’ chairman and former chief executive.
Seritage announced a partnership earlier this year with Atlanta-based investment firm Invesco, which infused $50 million into a $145 million redevelopment of the Santa Monica property, dubbed Mark 302. The building – which sits across from the Santa Monica Place shopping center – is being gutted to make way for open floor plan offices, restaurants and retail spaces, with a targeted opening of fall 2019.
“The location of that Sears is in a very high-end, high-net-worth community,” said Jay Luchs, vice chairman at the L.A. office of New York-based real estate brokerage Newmark Knight Frank. Luchs, who is the leasing agent for the 65,000-square-foot former Fred Segal Inc. store on 500 Broadway a few blocks from the Sears building, he said he expects similar tenants at Mark 302 to the types he’s pursuing for his listing.
“We’re talking gyms, food courts, restaurants and smaller stores for retail,” he said. “Most retail will have an experiential component to bring foot traffic into stores; that’s a given.”
At least two other Sears stores are slated for redevelopment in L.A. County. Downtown-based developer Izek Shomof is working deals to turn a Sears in Boyle Heights into a mixed-use residential site, and Mid-Wilshire-based developer CIM Group plans to turn a Sears in Hollywood into a mixed-use development complete with residential units and retail space.
And there are more Sears properties coming onto the market.
The company announced earlier this year the closure of 46 unprofitable locations, and added in its bankruptcy filing this month that it would close an additional 142 stores nationwide. At least two stores in L.A County, a Sears in Montebello and a Kmart in Miracle Mile, will close by the end of 2018.
There is already a proposal by Beverly Grove-based property owner Arba Group to redevelop the Kmart at 6310 W. Third St., with plans calling for a 26-story, 380-unit residential tower.
Landlords stand to make a lot more money redeveloping the real estate of big box retailers such as Kmart rather than having the stores as tenants.
“Retail leases vary, but older malls and complexes that have these big box anchor tenants enjoyed low rent,” said Bill Walzer, real estate attorney and partner at New York-based law firm Davidoff Hutcher & Citron. “The idea was that these big names would lure customers into other shops as well.”
DJM’s Parton added that developers are repositioning away from big box retail as the main asset.
“Mixed-use projects where retail is a component but not the main attraction is the way forward,” he said.
Searing critiques
The larger Sears bankruptcy has produced some critics of the company’s strategy.
The retailer has not turned an annual profit since 2011 and has tried for years to strengthen its balance sheet by selling off assets. Deals have included the acquisition of Sears’ Craftsman brand by Stanley Black & Decker Inc., and the sale of properties to Seritage.
The Seritage deal was particularly eyebrow raising because Lampert, whose hedge fund ESL Investments Inc. is both Sears’ largest shareholder and largest lender, has been accused by some of carving out a portfolio that was worth more than Seritage paid. Sears did not return calls for comment.
“The consensus is that the properties Seritage bought were cherry picked − they were the best ones,” Walzer, the real estate attorney said.
Lampert’s leadership also has been called into question as investors and analysts speculate he didn’t do enough to keep the retail chain alive, instead choosing to enrich himself as the company floundered.
“He was the principal at Seritage and the principal at Sears,” Walzer said. “If this goes into Chapter 7, the appointed trustee will be looking into fraudulent conveyance.”
As long as the company avoids liquidation, Lampert may be able to offset billions in future profits due to Sears’ high net operating loss, Walzer said. Lampert will likely benefit because he is the company’s largest shareholder and creditor, having pumped $2.6 billion in loans into the retailer.
Sears filed for bankruptcy when a $134 million loan came up for repayment. It listed $6.9 billion in assets and $11.3 billion in liabilities, according to court documents. Since filing, the retailer has secured $300 million in loan financing from Bank of America Corp., Wells Fargo & Co. and Citigroup Inc.
The Kmart brand came under the Sears ownership when the two companies merged in 2004. The brands together had approximately 2,300 stores across the country at the time of the merger and now have around 700, not including the 142 slated for closure in the bankruptcy filing. Sears is also planning to sell 400 of its best-performing stores in an auction in January to a buyer that will keep them operational, according to court documents. The company counts 68,000 employees on its payroll.
