NEWPORT BEACH, CA—Sears is continuing to close stores, and it's having an impact on retail centers nationwide. The Orange County Register reported in late July that the Segerstrom family has bought out the owners of the Sears store at South Coast Plaza in Costa Mesa, CA., from Sears Holdings Corp., operators of the Sears and Kmart chains. For now, Sears will still run the store, but as a mall tenant.

To get a retail expert's take on the move and what the Sears saga means for the retail real estate sector, GlobeSt.com spoke with SRS Real Estate Partners' leadership Matt Mousavi and Patrick Luther about how they see this playing out.

According to the SRS executives, Sears Holdings continues to close stores at a rapid pace, with 43 stores set to be closed within the next few months, comprising 30 Kmart locations and eight Sears locations. In total, this brings the store closure count for 2017 to more than 300. “As the impacts of e-commerce and the reality of slower foot traffic sets in with big-box retailers like Sears, we expect to see continued store closures in this space as retailers optimize their store counts and downsize footprints,” say Mousavi and Luther.

However, while e-commerce is thriving, overall retail sales are thriving as well and growing, the pair points out. The narrative should not be that brick-and-mortar retail is going away, they say, but rather about the evolution of retail that is taking place, and in that context, the retail industry is doing quite well. They point to recent statistics published by the US Census Bureau and the US Department of Commerce that show total annual retail sales growth was up approximately 5% from $1.189 billion in Q1 2016 to $1.25 billion in Q1 2017. In-store sales grew by 4.3%, from $1.097 billion to $1.144 billion, with brick-and-mortar sales representing approximately 91.5% of all retail sales. Not surprisingly, they say, online sales grew by more than 14.7% from last year, making it clear that retailers must continue to improve customer experience and attract consumers by offering a more enjoyable and exciting environment, one that is complimentary to online retail.

Regarding the South Coast Plaza transaction, Mousavi and Luther say, “The sale of the Sears store at South Coast Plaza was one of the largest transactions in Orange County thus far in 2017. Sears opened at South Coast Plaza 50 years ago. In July, the owners of South Coast Plaza announced that they had acquired the site for $187 million. South Coast has evolved into a premier shopping destination with approximately $2 billion in annual sales, making Sears a mismatch with the rest of the mall and—in our opinion—a smart move on behalf of ownership in terms of control rights and future flexibility.”

The two say this site was one of Sears' last crown jewels in their real estate portfolio, and the iconic chain is continuing its plan of disposing of assets and utilizing the proceeds to fund its operations. “Short term, it is reported that Sears will continue to operate at South Coast Plaza as a tenant of the mall. Long term, the redevelopment opportunities are abundant for the mall owner, including entertainment and dining uses and smaller-format retail, including higher-end and boutique retail.

As for the best use of Sears space nationally if the retailer were to close its doors, Mousavi and Luther say ideas and concepts are being developed to address the use of excess and vacant big-box retail space like a Sears or a Kmart. “Other retailers could take over the space, whether it be a single user or demised into junior-anchor space. Big boxes can evolve into venues for other retailers to house memorable and immersive experiences for consumers. Ikea, for example, uses its stores to stage fully furnished rooms, kitchens and other spaces where shoppers can actually experience the feeling of being in a remodeled living room. Retailers like Bass Pro Shops, REI and others go beyond by holding classes and events to attract shoppers to spend meaningful time at their locations. Utilizing the space creatively to attract consumers is the key and done in such a way that compliments the online marketplace and impacts the senses.”

The SRS leadership points out that we have seen big-box retail being converted to food halls with a wide array of dining options. Others have been torn down to accommodate hotel or multifamily developments. A mall in an Arizona submarket is being repurposed into a health-and-education facility, which will gentrify the surrounding retail that's been blighted due to the mall being vacant. “If there's a will, there's a way, and real estate developers and owners tend to be entrepreneurial in nature. With the increasing speed in which e-commerce is changing the retail landscape, now more than ever, owners and developers are feeling the pressure to evolve or have their malls and anchor spaces become obsolete.”

Sears dates back to the 19^th Century, but the company's woes go back over a decade, the two add. “We see their spaces being turned and converted, and unless a merger or major acquisition is made, we don't see the Sears of today continuing into the future. Sears' turnaround and closing efforts has helped their bottom line—they have saved billions in cost cutting and raised proceeds through property and brand sales, including their sale of Crafstman for $525 million to Stanley Black & Decker.”

In an interesting recent twist to the Sears' saga, the company's recent announcement of its partnership with Amazon should help its Kenmore brand and their home-services unit, Mousavi and Luther say. “For the first time, the Kenmore brands will be sold outside of Sears stores and now on Amazon, which will potentially have a positive impact on sales, but exacerbate foot traffic and store-sale declines.”

Instant Insights /

Two Retail Experts' Take on the Sears Situation

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