A Costar Analysis
In Addition to its Remaining Stores, Sears Also has a Large Amount of Warehouse/Distribution Locations Totaling Approximately 24 Million Square Feet
While the demise or perhaps the significant reduction of Sears has been a foregone conclusion for some time, a much less-discussed aspect of the retailer’s bankruptcy this week is the potential disposition of its sizable warehouse and distribution real estate totaling around 24 million square feet, of which, 38 percent is owned by the company.
CoStar recently conducted an exclusive analysis of Sears-occupied and owned industrial space, as well as the distribution space of several other large retailers using a proprietary location-based productivity model (see Exhibit 1).
Incorporating geospatial analysis, CoStar first ranked the industrial spaces of major department store retailers and then evaluated the strength of those locations based on several factors in our productivity model, including demographics, density, households and income in the context of logistics and last-mile productivity.
The resulting measure gauges the attractiveness of every existing site in the country, independent of current use or building quality and physical characteristics.
Buildings were ranked based on two sets of criteria, depending on the property size. Last-mile properties, those with a rentable building area of less than 150,000 square feet, were ranked based on demographic variables such as incomes in the local area, while the regionally focused distribution properties of over 150,000 square feet were evaluated based on distance to population centers, transportation infrastructure, and existing supply.
Our analysis found that over two-thirds of Sears’ industrial square footage is located at above-average industrial locations.
Exhibit 1: Industrial Square Footage At Risk By Brand And Quality Of Location
A deeper analysis into Sears’ properties on these worthwhile plots of land reveals the different opportunities this real estate presents. Fifty-one percent of the square footage in high-ranking properties is located in major national and regional industrial markets, including Inland Empire, Chicago, Dallas-Fort Worth, Miami and Tampa, among others. Over 50 percent of last-mile properties are located in national/regional markets (See Exhibit 2), have average clear heights of around 20 feet, and an average age of 37 years.
Though many of these properties are small and old, they tend to be located in well-developed areas with strong tenant demand. One such property is located in the Dallas N Stemmons/Valwood Industrial submarket, a mostly built-out submarket with more than 51 million square feet of industrial space.
Although Sears is the largest tenant in the property, it only occupies 55,000 square feet, therefore the potential vacancy should be easier to back-fill, especially in a submarket where more than 70 percent of new leases signed since 2017 have been for spaces with less than 55,000 square feet.
The distribution properties located in national/regional markets (around 50 percent) tell a different tale, with average clear heights of around 26 feet, and an average age of 35 years, these properties likely require significant physical improvement to appeal to a modern logistics tenant.
A move out by Sears in these larger properties represents a greater risk, as it tends to be the largest or only tenant in the building, leaving the owner with an empty shell. The value of these locations is likely the land beneath the structure, offering investors a chance to buy into quality distribution submarkets that could present barriers to entry from a development or land availability standpoint.
On average, these older Sears locations are in the top 30 percent of distribution sites nationally, as measured by CoStar’s location scoring metric.
Exhibit 2: Percentage Of Well-Located Sears’ Industrial Square Footage In Major Markets
Over the past three years, Sears has sold around 50 percent of its industrial property holdings, yet only 31 percent of the sales have been concentrated in strong industrial locations, leaving quality industrial real estate up for grabs should liquidation ensue (See Exhibit 3).
Sears is currently selling some of these industrial properties, including one in Greensburg, Indiana, and another in Ocala, Florida. The Ocala center covers nearly 2 million square feet, making it the largest industrial property in Florida. It is located within a mile of the Ocala International Airport, and is a two-hour drive from Tampa, Orlando, Jacksonville, Gainesville and Tallahassee.
While industrial property owners with exposure to Sears should be wary of ensuing vacancies, potential investors, on the other hand, could look to increase their industrial holdings as more of the retailer’s well-located properties become available for purchase, not only considering the market itself, but also the caliber of the location.
Exhibit 3: Sears’ Industrial Square Footage Sold