Sears’ demise to hit small centres: expert

TIME OF TRANSITION

The downside of a Sears

Canada windup appears to be minimal for some of Canada’ largest retail landlords, but the story could end up being a lot different in small towns where retail tenants are hard to find.

Ed Sonshine, chief executive of RioCan, the country’s largest real estate investment trust, says Sears contributes only about 0.5 per cent of his company’s revenue and he expects to be able to lease the space to other tenants, probably at higher rents.

“There was one department store in Oakville that we actually bought back and we have other tenants for it. We are going to divide it up. Other than that, we have seven (Sears) Home stores and they are only 30,000 (square) feet.

“We are quite confident we can re-lease them all, probably before we get them back. They will probably come back by the end of the year because they have to do these liquidation sales,” said Sonshine.

A report, issued in June by RBC Capital Markets real estate analysts Michael Smith and Neil Downey, noted the downfall of Sears would have a minimal effect on REITs and other publiclytraded operating companies.

“Sears contributes generally less than one per cent of revenue for entities under our coverage. In our view, the second-order impact will pose the bigger challenge as it potentially puts approximately 14 million square feet of retail space back on the market — nearly equal to Target Canada’s approximate 16 million square feet of retail,” the pair wrote, noting that could impact rents and slow leasing velocity as retailers take a “wait and see” approach.

One public entity with slightly higher exposure is CT REIT, which derives about two per cent of its adjusted funds from operations from Sears, a figure impacted by a 660,000-square-foot Sears distribution centre in Calgary. Gaurav Mathur, manager of capital markets research at real estate firm JLL, said the fallout from Sears Canada will be a tale of two markets.

“The primary locations are definitely better off in terms of leasing activity and re-leasing. The challenge will be in the secondary and tertiary locations,” he said.

In a report issued by JLL this week, the real estate company argues that the retail landscape is going to evolve away from stores like Sears. “We acknowledge that the biggest impact of Sears’ restructuring will be the reintroduction of the Sears retail space into the Canadian retail property market,” the report states. “We foresee Canadian shopping centres transitioning away from the department store anchor model, thereby allowing the Canadian retail sector to evolve further.”

But in smaller centres, like Kelowna, B.C., the closure of the Sears stores in the local mall could present some tough issues for landlords.

“I would say filling the space is pretty challenging,” said Jeff Brown, with Colliers International in the city of 120,000, adding Sears’ local landlord may find in the long term the closure represents an opportunity to reshape its mall.