Seritage Might Have to Accept Price Discounts If It Hopes to Complete its Liquidation Sale
Originally published by Wealth Management
Retail brokers and consultants expect strong interest when Sears spinoff Seritage Growth Properties starts to liquidate the remainder of its assets, as recommended by its board of trustees. But these industry insiders expect discounts will be necessary in order to consummate transactions.
Shareholders recently approved a plan that will bring additional Seritage properties to the market during a time of rising interest rates and a slowdown in commercial real estate deals.
Despite that added challenge, Seritage assets are bound to garner a lot of investor interest, says Margaret Caldwell, investment sales broker at Northmarq, which provides capital markets services to commercial real estate investors. Many of these properties are located in prime markets, with strong population and income levels, she notes.
Typically, a Sears box attached to a regional mall includes the parking field surrounding it, which can add a significant number of acres to the property, making it all the more attractive to potential investors, according to Caldwell.
“There are lots of investors and developers that continue to look for opportunistic investments where they can create value,” Caldwell says. “Many of the Seritage properties provide exactly these types of opportunities—repositioning an asset, for example, through redeveloping these boxes into other uses, such as multifamily or exterior-loaded retail.”
Industrial and self-storage could also be among potential uses for those sites, according to other industry insiders.
The investor demand will be there as long as the pricing on the assets is in line with the market expectations for absorbing risk, backfilling vacancies and undertaking redevelopment, says Matt LoPiccolo, first vice president specializing in retail with Matthews Real Estate Investment Services. He expects that to be the case because Seritage has a loan payment due to Berkshire Hathaway.
“The demand is there, and it’s just a function of their expectation on the price and that’s why some of their deals have sat on the market for a while or fell out of contract,” LoPiccolo says. “[There’s interest] because you’re going to be well below replacement costs and land value. The opportunity creates value in terms of backfilling with better quality tenants or in-demand tenants. All of that just boils down to the time and cost to reposition or redevelop the site.”
The main challenge to completing sales of remaining Seritage assets will likely be what’s going on in the debt markets, says Daniel Taub, senior vice president and national director of retail with real estate services firm Marcus & Millichap. Some of the deals where there will be opportunity to create higher value are also going to be capital-intensive, and matching up those investment opportunities with the right capital—including both debt and equity—is likely to be more challenging due to the current instability in the capital markets, he says.
Neil Saunders, managing director at research firm GlobalData Retail, is a little more pessimistic. While there will be some demand for the assets, it won’t be as strong as it would have been a year ago, he notes. The market has turned downward, and people are more concerned about taking on debt to finance new transactions. Real estate values under more pressure as well, he adds.
“I think some of the yields people see coming from it are much weaker than they were last year and before the pandemic hit,” Saunders says. “There’s definitely something they can do in terms of a sale, but I don’t think they will get the maximum value out of these things. There are certain properties they will have to sell at a discount if they want to unload them.”
In the end, Saunders says, he sees the liquidation sales going through because Seritage must realize it could be more difficult to close deals in 2023 if rising interest rates and lower consumer sentiment further damages the economy.
“Maybe the thought process is to get rid of them now because they might get less in a year’s time,” he adds. “It’s not a great time to be selling, but the risk is if you leave it, it might be even worse.”
Pricing
Seritage properties will most likely be priced based on land values per acre in the local market or price-per-sq.-ft. for existing older buildings, according to Caldwell. Pricing would be maximized, however, if investors are provided the option to purchase these assets separately or in mini portfolios, she adds.
Caldwell doubts that the remaining assets can be easily sold as a portfolio other than at a discount, given the significant number of remaining properties and the diversity of locations included.
According to Taub, it’s hard to feel confident about prices and their impact on private and institutional investors at this time.
“Pricing seems to be the most difficult to get your hands around because of what it was 30, 60 or 90 days ago and what it is today, being materially impacted by what’s going on in the capital markets,” he says. “The market to varying degrees is impacting all asset classes in retail.”
Some of the assets, if there were stabilized and depending on their location, could have sold at cap rates in the high 5 or 6 percent over the summer. The ones offering more of a value-add approach or more of a redevelopment opportunity, could see cap rates reach the 7.5 to 8.5 percent range, Taub notes.
Potential buyers
The mix of interested buyers for Seritage properties could range from retailers to developers looking at the best possible uses, including multifamily, says LoPiccolo. Most former Sears and Kmart properties hold strategic locations and could also offer an opportunity to develop mixed-use projects, he notes.
Saunders expects potential buyers to include real estate developers, mall owners and private equity investors. That buyer pool is going to be a lot smaller than it would have been before the current economic environment set in, he notes.
“There would have been a whole suite of people interested, but now the prospective field is a bit thinner,” Saunders says. “I think you’re more likely to get some of those investment firms if they can see these as a long-term win for them. I don’t think you will get much interest from the retail community, quite honestly. There are buyers, but they are a bit more discerning, and you have to work hard to find them.”
Some buyers, however, will be attracted by the risk-adjusted returns and property locations, according to Taub.
“The real estate in many instances is fundamentally good real estate, including those in non-primary markets,” Taub says.
If the asset is attached to an enclosed mall, the mall owner may be the one to buy it because they could see it as a way to control their destiny and create additional value for their mall, Taub says.
In addition, the liquidation could open opportunities for investors who can complete all-cash transactions and wait out the current economic cycle, he says.
Where the assets are
During an initial offering, Seritage brought about 38 assets to market, and Taub says he’s awaiting an announcement for the next batch.
Seritage owns properties across the country, but primarily east of the Mississippi River, he notes. They are located along the East Coast from New Hampshire, New York, Delaware to Virginia, the Carolinas and Florida. There will also be opportunities in Ohio, Illinois and Wisconsin in the Midwest, Texas and Arizona in the Southwest, and California on the West Coast.
The properties vary tremendously, but the majority of the Seritage sites are in traditional suburban locations
“With some of them, [Seritage] had successfully executed on the majority, if not the entire business plan, on repurposing those spaces,” Taub says.
