Sears Canada has announced that it will be applying to the Ontario Superior Court of Justice for approval to liquidate all of its remaining assets, following announcements of previous store closures. Some mall landlords will struggle to repurpose some of the spaces vacated by Sears, though an expert says that there are opportunities to be had with these closures.
The Ontario Superior Court is set to hear the motion on Friday, October 13, and pending court approval, it is expected that liquidation sales at Sears Canada retail locations will commence by October 19, continuing for between 10 and 14 weeks. This follows the September 30 announcement that Sears would close an additional 10 full-line department stores and a Sears Home store, after a June announcement that the company would shutter 59 mostly smaller locations in this country, while also announcing that it was entering bankruptcy protection that month.
In total, about 12,000 people will lose their jobs as a result of the Sears Canada store closures — about 75% of those are part-time. Sears currently operates 74 full-line stores in Canada, as well as 8 Sears Home stores and 49 Hometown locations. Sears Canada was founded as Simpsons-Sears in 1952, and was known for its extensive catalogue offerings from its mail-order business in partnership with Toronto-based Robert Simpson Company, and Sears Roebuck of Chicago.
Executive Chairman Brandon Stranzl was recently working with a group to rescue the money-losing retailer, but they failed to reach an agreement after Stranzl bid on the company again last week. In a press release, Sears Canada said, "following exhaustive efforts, no viable transaction for the Company to continue as a going concern was received. Accordingly, Sears Canada, with the recommendation of its advisors and approval of the Monitor, FTI Consulting Inc., is seeking an order to commence a liquidation that would result in a wind-down of its business following Court approval.” Sears Canada went on to say, “The Company deeply regrets this pending outcome and the resulting loss of jobs and store closures.”
-Sears Canada Announces 11 Store Closures (September 30, 2017)
-Sears Canada’s Most Valuable Real Estate [Analysis] (July 26, 2017)
In a recent study conducted in partnership with DIG360 and Leger, it was determined that 28% of Canadians have shopped at a Sears store over the past year — that’s second to Hudson’s Bay, with 31%. The study also notes that Sears is strongest in small towns where people have more frugal fashion tastes, and that 65% of its shoppers in the past year are over the age of 45 — an age where fashion spending begins to decline. DIG360’s David Ian Gray notes that loyal Sears shoppers, who are older and don’t spend as much, will miss the store the most. As well, he noted that locations in smaller communities will be harder to replace. Just 5% of shoppers aged 18-14 shopped at a Sears Canada store over the past year. In addition, 11% of shoppers had reduced their shopping at Sears and 13% had stopped shopping at Sears in the recent past — significantly higher than other department stores.
We spoke with several major mall landlords about Sears Canada’s closures, and they agreed to provide insight provided that they were not directly quoted. One major Canadian landlord explained how Sears Canada’s exit will be good news for some of its malls, noting that Sears (along with Eaton’s and Hudson’s Bay) had a considerable amount of power in the 1970’s and 1980’s when they were opening many stores, and some of those leases had clauses that include ‘no-build zones’, basic veto on development, and no parking alterations, for example. Those restrictions will be lifted with the exit of Sears Canada for some of these malls.
Another landlord noted that it would be a “pain in the ass” to have to fill space, and that some landlords will have a lot of work ahead of them to repurpose the large spaces vacated by Sears Canada. The same landlord noted the complexities around ‘co-tenancy clauses’, where other retailers (usually smaller) may exercise their right to vacate a mall if another tenant leaves. “This can be a struggling tenant’s get out of jail free card if they have the proper co-tenancy clause,” said the one landlord who wished not to be identified.
Alternatively, rent reductions may be given if an anchor leaves — all potentially bad news for landlords. Sears Canada was paying low rents at many of its locations, however, and the landlord noted that there will be opportunities to fill these with higher-paying tenants, though there are costs associated with repurposing spaces.
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One expert willing to go on record is Peter Morris, Founder of consultancy Greenstead Consulting Group in British Columbia. He literally wrote the book on landlord leasing strategy, and provided us with some insight into the challenges and opportunities landlords may face with Sears Canada’s demise.
Mr. Morris explained how some malls will struggle more than others — strong malls will have few issues repurposing Sears boxes into new uses, which might range from leasing to a single large tenant, or demising for multiple tenants. Some weaker malls will no doubt struggle, especially those where Sears is the only major anchor. The loss of an anchor can have a ripple effect — less foot traffic means less sales for retailers remaining in the mall and even if a Sears space is repurposed, there’s still a construction period that would be disruptive.
‘Cascading co-tenancies’ may occur, he said, with some leases including clauses where tenants may leave if others exit a centre. He noted that he’s seen some malls ‘virtually empty out’ with such a situation. Another concern, he noted, is that in the process of divesting of its assets in bankruptcy, Sears Canada may sell some real estate to third parties. Landlords, as a result, might not get a say into who acquires the Sears space in their malls.
Mr. Morris also noted a few positives for landlords as Sears closes stores. Many of Sears Canada’s leases were at below market rents, and landlords may be able to fill these spaces with higher-paying tenants. Losing such an anchor can also create redevelopment opportunities previously not possible — some Sears leases prohibited development intensification at some malls. He noted that in malls with vast parking lots, acquiring Sears’ space would help facilitate intensification, which could range from adding retail space to adding residential, food/beverage and entertainment uses. Many malls are “parking lot pigs” and some landlords are seeking to intensify, which could include adding vertical parking structures in order to facilitate additional uses.
He explained that while a downside will be reduced traffic at malls, at least temporarily, Sears Canada isn’t the draw that it used to be. “The reason that Sears is liquidating is because it’s not the draw that it once was,” he said, going on to explain that replacing Sears with other tenants may ultimately increase traffic to the affected shopping centre.
There’s extensive news coverage on Sears Canada’s demise, and below are links to a few different articles that focus on a few different areas.
-Sears Canada throws in towel, seeks to close all stores, lay off 12,000 (Hollie Shaw/Financial Post)
-From catalogues to collapse: the history of Sears Canada (Toronto Star)
As well, here’s a link to Peter Morris’ book: Masterguide to Leasing for Retail Landlords.