Sonoma County retail sector strong enough to withstand departure of Sears

Another retail behemoth with a storied history is about to close its doors this holiday season in Santa Rosa.

However, the closure of the Sears department store at the Santa Rosa Plaza will come at a time of relatively healthy occupancy levels overall at Sonoma County's shopping centers. And since Sears has been floundering and shutting stores for years, its departure isn't expected to put a big dent in the local retailing sector.

Nationally, experts are predicting one of the better holiday sales seasons of the past decade, despite the swift pace of closures of national brand stores. Many are watching how U.S. shopping centers will reuse the open space and adapt to the shrinking of Sears, long one of the nation's top retailers.

“We don't think Sears will be around a lot longer,” said Steve Jellinek, a vice president for Morningstar Credit Ratings. “Basically it's going to be hard to turn it around.”

The Santa Rosa Sears store is expected to close around the end of the year. The company didn't respond to requests to provide a specific closing date. But the local store is filled with signs proclaiming discounts of up to 50 percent off the lowest prices and “ALL SALES FINAL.”

Santa Rosa's two enclosed malls, the downtown Plaza and Coddingtown off Guerneville Road, are two of the county's highest-profile shopping venues. Each sits near Highway 101, and both already weathered a closure of a major department store.

The Great Recession contributed to the end of Mervyn's at the Plaza in 2008 and Gottschalks at Coddingtown in 2009. The latter preceded the departure of a half-dozen smaller stores from the same mall.

In that period of economic duress, U.S. holiday sales were either in decline or flat. Store owners complained that business then was tough no matter where you set up shop.

In the ensuing years, Coddingtown began a continuing remake of the shopping center. It has ringed its exterior with Whole Foods Market, Target and Nordstrom Rack, as well as Chipotle Mexican Grill and BJ's Restaurant and Brewhouse. The center is now preparing a store for Ulta Beauty and another unnamed tenant to add to its exterior. There's also room for at least one more retailer on the Coddintown's outer ring.

Inside, the center still has more than a dozen vacant spaces. Mall owner Codding Enterprises is planning to undertake an inside renovation next year, according to a company statement.

Meanwhile, the Plaza downtown signed Forever 21 clothing store to take up the first floor that Mervyn's vacated 10 years ago. The second floor of that building remains vacant, and now the mall is facing another 60,000 square feet of empty space when Sears eventually leaves.

Simon Property Group, the Plaza's owner and one of the nation's largest shopping center owners, declined a reporter's request to discuss the future of the Sears property. That store property is owned jointly by Simon and Seritage Growth Properties.

“We have nothing specific to announce at this time, and we are still considering different redevelopment programs for this space at Santa Rosa Plaza,” a Simon spokeswoman said in a statement.

Retailers comprise a significant part of the county economy. Together, they employ more than 25,000 workers, or about 12 percent of the workforce. The retail sector's total payroll was $824 million in 2016, according to a new draft report provided by the Sonoma County Economic Development Board.

Despite the longterm challenges the two Santa Rosa malls face, the area retail outlook is mostly upbeat this holiday season.

David Codding, who with his wife, Melissa, owns Santa Rosa's Montgomery Village Shopping Center, said his staff is preparing for what “probably will be one of our best seasons ever in the shopping center.”

Through September, sales at the shopping center along Farmers Lane have increased 12 percent from the year before, Codding said. One new retailer, Soft Surroundings, opened in April and is “doing more sales than any other women's apparel store we have ever had at the Village.”

Rhonda Deringer, a partner in the Keegan & Coppin commercial real estate company, said the county's retail sector appears stable. She said the vacancy rate ended the third quarter at 3.9 percent of total retail space. For the same quarter in 2009 during the downturn, the vacancy rate was 9.2 percent.

Keegan & Coppin said the county has 18.6 million square feet of retail space, including 960,000 square feet at Coddingtown and 695,000 square feet at the Santa Rosa Plaza. While significant, Deringer said other cities built far more retail space in decades past and now find themselves more vulnerable to national brand store closings.

“We're not a region that overbuilds,” she said. “If you want to go to a department store, you only have a few choices in the North Bay.”

Already the smaller area shopping centers are looking to expand beyond traditional stores with fitness centers and medical offices.

“They love to occupy these retail centers that are accessible and visible,” Deringer said.

National store closures exploded in the last recession but didn't abate as the economy recovered. In May, the nation was on track to surpass a record 105 million square feet of store closures set in 2017, according to CoStar Group, a commercial real estate information company. In a report, the company said the U.S. has considerably more retail space per capita than Australia, France or Germany.

Amid that backdrop, Sears' latest plan to close 142 Sears and Kmart stores could cause further difficulties for malls in secondary markets that already have suffered closures. Such locations “will be less desirable to prospective tenants and repurposing may prove difficult,” according to an October report by Morningstar.

Sarah Helwig, a Morningstar assistant vice president and an author of the report, said a Sears closing can enable smaller tenants to demand rent concessions from mall owners. Such tenants often have clauses in their contracts that provide for renegotiating or canceling leases after losing a “big anchor that drives traffic to the mall.”

Even so, Morningstar's Jellinek said Simon Property Group, the Plaza owner in Santa Rosa, has sought to turn the departure of anchor retailers into opportunities to reinvigorate malls. At the King of Prussia Mall outside Philadelphia - one of the nation's largest shopping malls with about 3 million square feet of retail space - Simon filled a former Sears store with European apparel retailer Primark and Dick's Sporting Goods.

“Simon is very familiar with re-tenanting, and they've got the deep pockets to do it,” Jellinek said.

Company CEO David Simon told retail analysts and investors in a conference call last month that the shopping center owner was “putting Sears in our rearview mirror.”

Simon said his company next year will spend more than $1 billion to upgrade its U.S. retail properties, just as it has done annually for the past six years. And while he called it tragic that a longtime retailer like Sears was going out of business, he expressed confidence that Simon would bring in more shoppers with new tenants.

Once the centers are redeveloped, he said, “we're going to be able to make money on this.”

In place of traditional stores, some malls have added fine-dining restaurants rather than the traditional food court options, plus movie theaters and children's attractions like Legoland Discovery Centers.

“It's all about increasing the experience and getting shoppers to stay,” Jellinek said.

There's no more important time to do that than from now through the holidays. Holiday sales nationwide are expected to increase as much as 4.8 percent from last year to nearly $721 billion, according to the National Retail Association.

Meanwhile, online sales this season will jump an estimated 14.8 percent to $124.1 billion, according to an Adobe analysis of one trillion visits to U.S. retail web sites.

Lois Codding, part of the family ownership of Coddingtown, declined an interview request for this story. In two brief statements, she indicated the mall soon would announce a second “major retailer” for an exterior space next to Ulta Beauty, and it has removed another building in hopes of attracting another national tenant for the exterior of the shopping center.

Also, Codding Enterprises is preparing a remodel next year as part of efforts to lease more interior space.

“We hope to create and bring something unique to Coddingtown that will become more of a destination for shoppers and attract more tenants,” Codding said.

At lunchtime Friday, architect Carl Servais exited the Sears store onto B Street after visiting the Plaza's food court. He acknowledged he isn't much of a Sears shopper but said, “I'm curious about what comes next.”

He expressed hope that the mall would add more places to its exterior like Two Tread Brewing Co., which has an outdoor patio on B Street.

As Santa Rosa tries to encourage more downtown housing to bring more residents there, he said, the street would benefit from changes that attract more pedestrians along the mall's brick exterior and the soon-to-be-empty Sears parking lot.

Surveying the scene, Servais said, “They could enliven this quite a bit.”

You can reach Staff Writer Robert Digitale at 707-521-5285 or robert.digitale@pressdemocrat.com. On Twitter @rdigit.