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Report On Business Sears landlords face major vacancies amid a changing retail landscape

Shoppers ride an escalator in front of a Sears Canada Inc. store inside a mall in Toronto, Ontario, Canada, on Thursday, June 22, 2017.

Cole Burston/Bloomberg

Landlords of Sears Canada Inc. face the spectre of more empty spaces in their malls as the insolvent retailer prepares to close all 131 of its remaining stores by early next year amid other retail failures and vacancies.

Sears's impending store liquidations come while some landlords are still struggling to find tenants to replace U.S. discount chain Target Corp., which shut all of its 133 stores in this country in 2015. Other retailers that have closed some or all of their stores include BCBG Max Azria, Express, HMV, Jean Machine, Tip Top Tailors, Lululemon's Ivivva, and American Apparel.

"There's a general uncertainty," said Patrick Sullivan, chief operating officer at Primaris Real Estate Investment Trust, which has nine Sears stores. "It's just a matter of timing."

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Sears will ask the Ontario Superior Court on Friday to approve its total liquidation, a move that is forcing landlords to find new tenants, reconfigure and break up their stores for new uses or tear them down in part or entirely.

The revampings are more difficult in a fast-shifting retail landscape with a growing number of retailers shrinking their brick-and-mortar space as consumers increasingly shop online.

Still, landlords today are in a better position than two years ago, when Target abandoned its Canadian stores, because that exit came as a surprise. Sears' failure had been expected for years. The retailer, which won court protection from its creditors in June, has performed poorly, giving property owners time to map out contingency plans for the space.

"The Sears thing is no surprise," said Edward Sonshine, chief executive officer at RioCan Real Estate Investment Trust, which had several Sears stores when the retailer went into insolvency, mostly Home outlets.

RioCan was among landlords that felt the pain most sharply when Target closed, because it was the largest Target property owner, with 26 of its stores. But Mr. Sonshine has said that RioCan has profited from Target's exit because replacement tenants pay more than Target, whose rents were only about $7 a square foot.

Mr. Sonshine said RioCan's Sears Home stores are in good markets such as Whitby, Ont., and he does not expect to have any trouble finding new tenants.

As for other locations, "some of those landlords are going to have a tough time," he said.

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Matthew Smith, executive vice-president capital markets at Jones Lang Lasalle, said most landlords were locked into long-term, low-rent Sears leases of $2 to $5 a square foot, and can now seek new tenants for potentially up to 10 times those rates in major markets.

But in secondary, less attractive markets, "that is where there will be more pain," Mr. Smith said. Most Targets were single-level stores and could be divided into smaller ones, he said. "When you have a Sears that is two storeys in a mall, it is not as easily leased."

And while call centres were once a good option for malls, they are not as prevalent, although other alternatives, such as government, medical, college or university uses are possible, he said.

Even the best-laid plans for Sears space are being adjusted in the fast-changing retail environment, Mr. Sullivan said. "Plans will change ... we're changing them now."

Primaris will tear down at least part of some of its Sears stores, having learned from the Target experience that it can be difficult to fill all the space in empty former stores, especially the back portion of them, Mr. Sullivan said. Sears's stores are in much worse condition than those of Target, which poured money into upgrading its outlets when it arrived here.

Some malls have both a Sears and a former Target. For example, Primaris's McAllister Place Shopping Centre in St. John, N.B., has a Sears closing down and a former Target store; as well, a Sobeys recently moved out.

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Part of the Sears store will probably be knocked down while the Target space was filled by a number of different tenants, including H&M, Dollarama, Party City and Good Life Fitness, Mr. Sullivan said.

The Sobeys store has been leased to a new tenant that will move in next summer and start paying more in rent than Sobeys had paid, he said.

Primaris is also counting on finding replacement tenants for Sears that will pay more than its average rent of $3.50 a square foot, he said.

"It will take a little time to get these things over the goal line," he said.

Jean Rickli, senior adviser with retail consultancy J.C. Williams Group, said landlords need to move quickly to find solutions for their empty Sears space. It is an opportunity for some to raise their rents from the ultra-low rates Sears enjoyed on its leases.

Sears locked in sweetheart deals with landlords in the 1970s, when property owners were expanding their malls and Sears was a must-have tenant that drew shoppers to their centres. "They were powerful and had very favourable rents," Mr. Rickli said.

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