Now that Sears Holdings Corp. has filed for Chapter 11 bankruptcy protection, real estate investors diversified and tilted toward core properties should see less downside risk.
Questions intensified over the retail legend's prospects in March 2017, when Sears warned that it may not be able to continue as a going concern. That gave institutional investors enough time to gauge the potential impact of a bankruptcy filing, which came Oct. 15.
The bottom line: While the pain to mall owners will be real and long lasting, investors with core portfolios that hold high-quality retail properties in good locations should be fine because those properties are more likely to withstand a Sears or Kmart store closure, industry sources said.
Many institutional investors still have a large portion of their real estate portfolios — 40% to 60% — in core, according to consultant Meketa Investment Group Inc. But investors in some real estate investment trusts could feel pain should more vacant stores clog the market, potentially triggering co-tenancy clauses that would give other tenants a chance to terminate their leases without penalty.
In all, REITs and institutional real estate managers owned about 30% of retail real estate in the U.S. as of Sept. 30, 2017, according to estimates by LaSalle Investment Management Inc., Chicago.
That's where having a high-quality property will help. Owners of top-shelf malls will find it easier to redevelop the property and re-lease it for higher rent, said Benjamin Lentz, Baltimore-based managing director and director of research for LaSalle's securities business
Meketa began fielding calls from clients 18 months ago asking about the impact of a Sears bankruptcy and bankruptcies of other large retailers on real estate portfolios, said Christy Gahr, Westwood, Mass.-based principal.
"The headlines are scary," Ms. Gahr said. "It's easy to think that it would have a material impact on the real estate program."
As a result of a study Meketa conducted following those calls, the consultant concluded that core real estate managers tended to have exposure to the retail sector ranging from 20% to 30%, she said. The NCREIF NFI-ODCE index is approximately 20% retail; the NCREIF Property index is 23% retail.
Closed-end value-add real estate funds had 6.3% in retail as of Sept. 30, 2017, according to NCREIF Fund Index-Closed-End Value-Add.