Western Real Estate Business

JUL 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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22 • July 2018 • Western Real Estate Business www.REBusinessOnline.com THE IMPACT FROM SEARS' WOES NOT AS HARMFUL IN THE WEST It's no secret Sears is facing some uphill struggles. Fortunately for the West, however, these struggles have been minimal in comparison to the rest of the country. By Steve Jellinek E nclosed shop- ping malls have faced a barrage of re- tail downsizings over the past few years. This was led by once-dominant Sears Holdings Corp., which has seen its total store count tumble to 979 (547 Sears, 432 Kmarts) as of Feb. 3, 2018, with same-store sales declining in each of the past 14 years. That's less than half the 2,071 stores it operated in 2012. Comparatively, JC Penney Com- pany, Inc., with not quite as unwieldly a store base, has shuttered 241 stores since 2012, or about 20 percent, bring- ing its total down to 872 as of Febru- ary 2018. So far, lenders and investors in the Western United States have been spared the brunt of Sears' closures that have occurred since the down- turn of the industry. Fewer than 30 Sears have closed since 2014 in Ari- zona, California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon, Utah and Washington. Although the company's most recent announce- ment cited plans to shutter 48 Sears and 15 Kmart stores this summer, these Western states came away rela- tively unscathed, with just nine stores slated to close, including a mere four Sears stores. The Tacoma Mall in Washington State is in the best position to sustain the loss of its Sears store. At more than 1.4 million square feet, the mall ex- panded to become one of the largest in Washington and is in the top-third tier of Simon Property Group's properties. Indeed, Simon sees the Sears closure as an opportunity and, in March, an- nounced plans to redevelop the space to make way for new shops and a movie theater. Focusing on competition and loca- tion as key productivity drivers sug- gests that the Metrocenter Mall, which is in a challenging area of Phoenix, may not be viable. Built in 1973, it was among the first malls west of the Mis- sissippi River to have five department stores. Just two remain open, and the mall sits in the middle of a city-desig- nated blight area. The Carlyle Devel- opment Group purchased Metrocenter while it was in bankruptcy in 2012. Given its age, middle-tier anchors (a Dillard's and a Wal-Mart Supercenter), and decline, the outlook appears grim. Location, Location, Location A shifting retail environment is leaving many regional malls with de- clining sales and occupancy. The key shift underway favors properties in the upper-quality tier with dominant positions in their markets. Sales that often average more than $400 per square foot and strong tenant demand allow mall owners to justify investing additional capital to maintain desir- ability and stable occupancy. These properties are then able to attract and retain more tenants, as well as repur- pose large anchor boxes. At the other end of the spectrum are properties that may not be dominant in their markets but have stable sales and occupancy. These malls will rely on steady cash flow and astute own- ership that can adapt to the changing landscape and transform their prop- erties into entertainment and dining destinations to broaden their appeal. They are likely to continue to expand, offering more diverse experiential of- ferings to drive traffic and revenue. So, who gets left behind? Lower- quality assets, particularly those in secondary and tertiary markets, con- tinue to struggle with a loss of tenants and cash flow. Without sales to justify the occupancy costs, tenants at weak malls are forced to shutter stores in search of more profitable locations. The closure of an anchor tenant often triggers co-tenancy clauses that allow other mall tenants to exercise the right to terminate their leases or renegotiate the terms, typically with a period of lower rents, until the co-tenancy issue is resolved. The loss of multiple ten- ants may become grave when a limit- ed customer base constrains the pros- pect of finding replacement tenants. A lack of alternative uses for regional malls, particularly those in secondary locations with little land value, may exacerbate the potential for a swift, deep devaluation. Steady as She Goes Morningstar Credit Ratings, LLC expects Sears to continue closing stores amid unrelenting same-store sales declines. While Sears still oper- ates 132 stores in the Western U.S. that could potentially close, including 70 in California, several factors suggest that the Western mall landscape is likely to remain stable despite Sears' continued downsizing. The region has benefitted from improving economic growth af- ter a sharp downturn following the financial crisis. Wallethub.com reports the five states that comprise nearly three quarters of the Sears exposure — California, Idaho, Oregon, Utah and Washington — all fall within the top 10 in its economic rankings based on factors such as GDP growth, employ- ment and household income. Lastly, with above-average sales per square foot of more than $400, suggesting most malls are of higher quality that benefit from strong demand, most vacancies are likely to be filled in a timely manner. Steve Jellinek, Vice President of CMBS Research, Morningstar Credit Ratings Fewer than 30 Sears have closed in Arizona, California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon, Utah and Washington since 2014, sparing this region from some of the hits taken elsewhere. Jellinek SEARS HOLDINGS WESTERN CLOSURES PROPERTY LOCATION TENANT Metrocenter Mall Phoenix Sears Puente Hills Mall City of Industry, CA Sears Cottonwood Mall Albuquerque Sears Tacoma Mall Tacoma, WA Sears China Lake Blvd. Ridgecrest, CA Kmart West 58th Ave. Arvada, CO Kmart Nawiliwili Road Lihue, HI Kmart Carlisle Ave. Alburquerque Kmart NE Sandy Blvd. Portland, OR Kmart Source: Sears Holdings Corp. W H A T ' S B U G G I N ' Y O U ? Pest Control for Professionally Managed Properties OFFICE RETAIL INDUSTRIAL RESIDENTIAL Eco-Friendly Solutions | Serving Southern California Pest Control Pigeon Control Termite Control Rodent Control Bee Control Gopher Control 1.877.522.2377 | www.AccessExt.com

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