By Betsy Denson
When the Sears at 4000 N. Shepherd Dr. closed in the summer of 2020, there was sadness from some, and anticipation among others, regarding what it might become. With the property seemingly in limbo, it appears the answer will have to wait.
As The Real Deal reported, it was five years ago that Sears spun off Seritage SRC Finance LLC, a publicly traded real estate investment trust, to raise much-needed funds. And in June, Seritage decided to terminate the master lease of most of the remaining Sears and Kmart stores on its roster due to their declining sustainability, even before COVID-19.
The decision netted Seritage a $5.3 million termination fee from Transformco, Sears’ parent company, which acquired Sears out of bankruptcy in February 2019. The date for final payment of “the completion of going-out-of-business sales” was Wednesday.
“There’s a reason why finance guys shouldn’t get a hold of real estate companies,” said one local commercial real estate executive. “It is a lose/lose.”
Now the property is a “for lease’ listing on the Seritage Growth Properties website. The company did not respond to media inquiries about whether the property was also available for sale.
The Harris County Appraisal District appraised the value of the site, which encompasses 509,000 square feet of land and 169,075 square feet of building area, at $6,406,187 in 2020.
Some believe the property is worth quite a bit more.
“The land could be worth anywhere from $20 to $40 per square foot depending on the timing in the market,” said one local real estate developer.
The executive in commercial real estate said the site is an awkward configuration if it is indeed for lease, rather than for sale. Although he said a long-term ground lease in which the buildings could be torn down was a viable option.
“If it is a straight sale then it is more cut and dry,” the executive said. “There are a lot of upsides even in a down market, especially if the matter of ownership is simple.”
Some clues about the property’s future may be gleaned from the company’s mission as listed on its website: to create and own revitalized shopping, dining, entertainment and mixed-use destinations that provide enriched experiences for consumers and local communities and create long-term value for shareholders.
The Real Deal reported that the REIT has pitched alternative uses for former Sears locations in other states, such as redeveloping them into apartments.
Reuben Gregg Brewer is a New York-based financial blogger who has written about Seritage and Sears for The Motley Fool, a private financial and investing advice company based in Alexandria, Virginia. He said the Seritage business model of converting the low-rent rates – in the $4-to-$5-per-square-foot range for Sears Holdings in 2016 – to new leases that same year at $18.55 per square foot on average was an enticing business model for a time, until it wasn’t.
Brewer said a sale of the Sears property is still a possibility.
“The REIT sells assets, so nothing is off the table,” he said.
The million dollar question to Brewer is if the market and location are desirable enough for the company to invest in updating it.
“Once great plans could easily have been put on the back burner,” he said.
Stacy Mathews, a real estate broker at Berkshire Hathaway HomeServices Premier Properties, hasn’t heard anything about the property but said a mixed-use development, with residential and retail, might be the best use of the land and the highest return on investment.
“I think there is (still) a need for residential,” he said. “Houses are selling very quickly.”
One area landowner who preferred to remain anonymous said the current pricing will likely be a deterrent for traditional one-story retail. He said that while the market is growing, there’s currently not sufficient demand for denser retail development.