To be or not to be: The Impact of the Sears Bankruptcy on the Real Estate Market
Real estate investors are closely watching the developments in the Sears bankruptcy case because the outcome of case will have a substantial effect on the retail real estate market. Stakeholders are considering whether to liquidate the company or to accept or oppose the bid put forth by Eddie Lampert, the former CEO of Sears, to purchase the company through the hedge fund founded by Lampert, ESL Investments, and continue operating Sears in some form. As it stands now, it seems likely, though not certain, Lampert’s bid to purchase Sears will go through so that Sears can continue to operate through a decreased number of stores. Sears had been operating as many as 4000 stores in 2012, but through a series of rounds of store closures has decreased that number to about 700 when it filed for bankruptcy in October, 2018. If the sale to Lampert goes through, another round of store closures will decrease the number of stores to about 400. The good news for its remaining employees and loyal customers is that it will continue to operate as a going concern and retain many of the jobs in its company.
It appears that Sears will be able to avoid a complete liquidation. If it had liquidated during the bankruptcy, its closing would have shuttered 100 million square feet of retail real estate space into an already oversupplied market. This increase in supply would have given potential tenants more options for suitable space to rent and increased bargaining power to negotiate more advantageous lease terms.
The closing of a Sears store that is an anchor may be a death blow for some malls struggling to survive, for others it could be an opportunity to increase the value of their real estate holdings. For some, a Sears closing could represent an opportunity to redevelop a property, attract tenants who will bring more foot traffic, charge higher rents, thereby increasing the value of their properties. In many malls where Sears is located, Sears pays lower rents because of the increased foot traffic it brought to the mall before its decline. As Sears has lost its previous market share to competitors, the lower rents it is paying may not be in line with the economic benefit it is bringing to neighboring stores in the way of increased foot traffic.
Some owners could even redevelop their properties with mixed or alternative uses such as office space, hotel or even multi-family. If a Sears store closes, those owners with enough capital to survive the period of vacancy and to absorb the costs needed to redevelop the property could reposition their property to produce higher income than if Sears had remained open.
Although Sears may have avoided the closure of 400 of its stores, the question remains whether it has avoided the closures or merely delayed the closures. This delay may be sufficient to keep some struggling malls from going under, but many commentators believe that Lampert’s strategy is merely delaying the inevitable.
For now, it appears that the flood of store closings that would have occurred if Sears had liquidated is not today’s problem. The closings instead will occur more slowly to get to the target of 400 stores. The owners of properties that will have to deal with a Sears store closing will at least have the benefit of redeveloping their properties in a market that is not experiencing a flood of Sears closings all at once.
Allobar Strategies, a property tax consulting firm has ability to assist taxpayers with issues with their tax assessment and how to file a tax abatement. Allobar puts emphasis on client service excellence and achieving the best results possible for the circumstances of the case.
By: John F. Hayes, Esq., General Counsel to Allobar Strategies and former general counsel to the New Hampshire Department of Revenue Administration
For more information on property tax abatement appeals in New Hampshire, please visit Allobar Strategies.