The bankruptcy saga of Sears ($SHLD) is giving yet another challenge for real estate investment trusts (REITs) months after Toys R' Us closings turned millions of square feet into a retail wasteland. Fortunately, the damage will not be as bad for them as what the toy store giant caused. Not all Sears and Kmarts are closing down, not all locations are under leases from REITs, and some of the biggest REITs have already developed planned to fill these gaping retail holes with mixed-used spaces.

But still, should Sears be wiped off the map, it will leave, on average, tens of thousands of square feet vacant per location.

Sears and Kmart locations before closures

Data from Thinknum shows that the average open Sears and Kmart location on October 1 was almost 68,000 square feet, over 20,000 square feet larger than the average of all Toys R' Us stores when it closed all its locations. 

That average was also larger than that of Sears and Kmart stores open as of January 1, which was a little over 63,000 square feet. At that time, more smaller locations were still open, which helped even out locations such as Saul Centers' 263,538 square foot megastore located within White Oak Shopping Centers in Silver Springs, Maryland.

Large Sears portfolios from Simon, CBL, Brookfield all shrunk

Sears' slow decline saw its stores close down over time, which affected the REIT profiles that currently have Sears or Kmart locations, or who lost them to bankruptcy. Here were the top-5 REITs tracked by Thinknum ranked by the difference of individual Sears and Kmart locations on January 1 and October 1:

REIT Locations on January 1 Locations on October 1 Difference
Simon Property Group 209 143 66
CBL & Associates Properties 122 87 35
Brookfield Property Retail Group (Formerly GGP) 93 80 13
Macerich 65 61 4
Brixmor Property Group 15 13 2

Simon Property Group ($SPG) has the most exposure to Sears and Kmart, followed by CBL & Associates Properties ($CBL) and Brookfield Property Retail Group ($BPY), which is the successor to General Growth Properties (GGP) after Brookfield acquired it in August. Not only that, but these three REITs saw the largest amount of closures this year before Sears filed for bankruptcy, with Simon losing 66 Sears and Kmart locations in that nine month period.

On the surface, it seems that Simon, CBL, and Brookfield will be in trouble with tens (and potentially hundreds) of giant retail spaces no longer collecting rent income and possibly slowing down foot traffic to neighboring stores. However, with plenty of time to prepare for Sears' impending doom, all three of these REITs have begun transforming these locations into multiuse retail spaces.

As we wrote yesterday, Simon and Brookfield are surviving the "retail apocalypse" by putting billions of dollars into conversions. CBL is following suit; in a recent update to shareholders, CEO Stephen Lebovitz said that that the company has been preparing for "an eventual Sears bankruptcy since 2013." It even purchased three locations in 2017 that were listed in Sears' recent anticipated store closings — Hamilton Place, Jefferson Mall and Cross Creek — and already has redevelopment plans in process for all of them.

Should Sears go by way of Toys R' Us and have its assets liquidated, millions of retail space will be up for grabs, but the biggest REITs are well prepared for a future without it.

Map of all Sears locations on October 1 owned by top-15 REITs with exposure. Thinknum subscribers can see the full map here.

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