The collapse of Sears Canada, leaving vacant stores across the country with enough square footage to cover two-thirds of Manhattan Island, could actually boost profits for many mall owners who will be able to replace the retailer with tenants who can afford higher rents.
Sears Canada, which begins liquidation sales on Thursday, is the latest casualty in the reeling retail industry, where average operating profit margins have been stuck below five percent. The Internet and modern technology have punished brick-and-mortar stores that failed to meet customer demands for convenience.
Mall owners have some hope amid the gloom.
"This is a silver lining for some landlords," said Craig Patterson, a special projects consultant for the Retail Council of Canada. "Sears had a lot of power in the '70s and '80s, and they put a lot of covenants into their leases which were restrictive for mall owners. They can now rent for more money per square foot."
Many landlords are already lining up new tenants and refitting the nearly 15 million square feet vacated by Sears, according to CBRE data. That accounts for about 2.4 percent of all Canadian shopping centers, based on Jones Lang LaSalle figures.
Cominar REIT (CUF_u.TO), a Quebec City-based property trust, rented seven stores to Sears, a total of 650,000 square feet, and 1.3 per cent of its portfolio, Caroline Lacroix, vice president for communications and marketing told Reuters. Lacroix said the trust is close to confirming tenants for two or three of the stores.
"It's going to necessitate some investment at the beginning of the process to make sure those spaces are leased," Lacroix said, adding that Sears has been paying 70 per cent below market rents for some stores. "At the end of the day, the higher margins we'll make will hopefully compensate for that."
FINDING NEW TENANTS
When Target Corp (TGT.N) exited Canada in April 2015, shutting 133 stores, Cominar split the space the U.S. discount chain occupied at its Centre Laval in Quebec and found three specialty retailers who pay higher rents, Lacroix said. She envisions a similar outcome for the Sears space.
The REIT has also received interest in the Sears stores from non-retail businesses like call centers, whose young employees want to be close to amenities and transport links, she said.
REITs will likely need to spend between $50 and $175 per square foot to refit the spaces, BMO Capital markets said in a report last week.
Despite the expense, Sears' exit gives mall owners the opportunity to add "more food and beverage options, services and entertainment tenants [that] could help fill space as landlords diversify away from department stores," the report added.
And with the space leased by the chain amounting to less than two per cent of gross lettable area for its biggest listed landlords, which include H&R (HR_u.TO), Cominar and RioCan (REI_u.TO), the impact on revenues will be limited, BMO research showed.
RioCan, which has Sears as a tenant at nine of its properties, is considering Hudson Bay Co's (HBC.TO) Saks Off Fifth store for nearly 40 per cent of the 104,000 square feet vacated by Sears Canada in a southern Ontario mall, which the REIT co-owns with HBC, it said in a statement this month.
Sears' lease agreement had development restrictions, and its exit allows the owners to pursue such work, RioCan said in the statement. The company said it is in talks with other retailers to fill the rest of the space.
A RioCan spokesman declined to comment further, and a Sears Canada spokesman declined to comment.
Smaller malls in more rural areas will find it more challenging, especially those that still have not managed to find tenants for space vacated by Target, said Sally Seston, managing director of Retail Category Consultants.
"Small mall owners are going to have to subdivide, find multiple smaller tenants," Seston said. "But a lot of merchants who would take that space are already in that mall."