- Mall landlords are increasingly seeking replacements for vacated department stores.
- The spaces present opportunities to bring in new retailers, and even mixed-use components like apartments and offices.
- General Growth Properties, for example, is partnering with residential REIT AvalonBay to redevelop one of its centers in Seattle.
As the year comes to a close and the holidays approach, mall owners are talking redevelopments, and particularly those of vacated Sears stores.
The timely discussion has been a reoccurring theme on many third-quarter retail real estate investment trust, or REIT, conference calls. Analysts and investors want to know: "What are you going to do with that big box?"
As Sears and other department store chains announce plans to shutter some locations, that leaves a mall landlord looking for a replacement — or a slew of smaller-scale replacements — and quick.
Many mall REITs have exposure to the Illinois-headquartered chain, including , , , and — a 2015 real estate spinoff from Sears Holdings.
"One of the key tenets of our business plan is capitalizing on the embedded opportunity with our portfolio to redevelop anchor boxes," GGP CEO Sandeep Mathrani said on a conference call earlier this week.
In October alone, GGP acquired two Sears locations — one in Pennsylvania and another in Louisiana. To date, GGP has invested more than $2 billion in redeveloping 115 of its properties, reaping "very attractive returns," Mathrani added.
The mall owner is bringing in fresh faces to retail, such as Forever 21's Riley Rose, Indochino and Untuckit. GGP also just signed an agreement with residential REIT to add living spaces to one of its malls in Seattle. AvalonBay is notably one of those landlords said to be working with Amazon to bring lockers to its residences.
"This represents our belief that high-quality retail centers can be densified with other users, given the location and market demand," Mathrani explained, saying similar projects could develop over time.
"We like that GGP is methodically addressing the contraction of department stores," RBC Capital Markets analyst Wes Golladay wrote in a note to clients. As retail REITs face headwinds from retailers' woes, "favorable financing activity and aggressive buyback activity" could help GGP longer term, Golladay added.
Pennsylvania REIT, another mall player with high department store exposure, announced on Wednesday plans to redevelop a dark Macy's store, replacing it with two off-price retailers.
"The Macy's redevelopment offers an opportunity to bring highly sought after, first-to-market retailers to a vibrant market – enabling us to further distinguish the property," CEO Joe Coradino said.
Over the past year, Pennsylvania REIT has been filling vacated department store boxes with retailers including Field & Stream, , and . Like GGP, Coradino and his team expect the incoming retailers to pay higher rents and amass more sales per square foot.
Just last week and ahead of reporting third-quarter earnings, Seritage unveiled plans to take one of its more than 200 Sears and Kmart locations, turning a portion of the store into a massive AMC Theatre.
"The partnership builds on our strategy to deliver a multi-tenant retail destination that provides an elevated shopping and entertainment experience for our customers," James Bry, executive vice president of development and construction at Seritage, said about the project.
Following the renovations, Sears will have a "consolidated" store on the lower level of the property, Seritage said. The mall operator has also noted in the past that former Sears stores perform better after being redeveloped, or leased to new tenants altogether.
Simon, the largest mall owner in the U.S., boasts more than 30 redevelopment projects, totaling $1.3 billion in expenses, ongoing. The REIT has been particularly keen of late to add more restaurants and food options to its properties, while experimenting with pop-up concepts.
"The issue with [retail] bankruptcies is you're at the whim of the court," Chief Executive David Simon said last week on a conference call with analysts and investors. "They can cancel [a contract] at a moment's notice, and it does take time to lease."
That being said, Simon continues to build out its assets in unique ways, as some anchors flee. One example of this is seen at Simon's King of Prussia property, in Pennsylvania, which recently lost a J.C. Penney.
Simon said plans are in the works for mixed uses such as hotels, apartments, office buildings and play space.
"The dot com era didn't kill the mall and the current retail headwinds won't kill off SPG's 'A' malls either," Boenning & Scattergood analyst Floris van Dijkum wrote in a recent note to clients. "We believe that SPG has significant room to grow ... through the selective redevelopment of anchor boxes."
, with countless specialty brands announcing plans to close stores as part of their restructuring efforts. While mall owners hope less of that activity might happen in 2018, nobody knows for certain.
Next week department stores Nordstrom, Macy's, Kohl's and Penney's are set to report third-quarter earnings, which should offer some insight into retail's future, ahead of the all-important holiday season.