With its plans to pull out of 68 stores at 66 malls nationwide, Federated Department Stores is letting loose some of the best retail real estate on the market. How good is it? The day after Federated made its announcement, the Westfield Group said it was in discussions to buy the 12 stores located at its malls because it was confident it could bring in upscale tenants.

Although it may take several years to close all the deals, Federated shouldn't have any problems disposing of the space, analysts say. Spread out over 14 states, with 22 sites in California, the space is worth about $1.2 billion, according to analysts. The property includes locations at some of the best malls in the country, such as King of Prussia Plaza, Houston Galleria and the Natick Mall near Boston.

The 68 anchors Federated announced last week it was divesting is part of its merger with May Department Stores, which will also include the conversion of 330 May stores into Macy's. Federated has yet to make a decision regarding May's Marshall Fields division. The fate of 58 Lord & Taylor stores also remains uncertain leading many analysts to speculate that the division could be sold. Of the 68 properties, Federated and other department stores own about 36. The remaining 32 stores, or about 47 percent of the properties, are leased.

The question is who will get it: Mall owners looking to redevelop their entire properties or retailers wanting prime anchor space?

"I think you'll see a split between redevelopment by mall owners and some of the traditional mall retailers out there," says FTN Midwest Research analyst R. Jeffrey R. Stinson.

It appears Westfield will use the space for redevelopment. "If successful, the purchase of these stores would create the opportunity to further redevelop and improve our portfolio, as well as substantially increase our development pipeline in the United States," said Managing Director Peter Lowy.

Possible redevelopment of the former anchor space could mirror similar projects Westfield is undertaking at its two malls near Sarasota, Fla.: Southgate and Sarasota.

At the 422,000-square-foot Southgate mall, the company is adding 160,000 square feet of high-end specialty retail for upscale customers. Westfield is also trying to turn its Sarasota mall into an entertainment hub by building a new 12-screen AMC Theatre.

Despite the fact that mall owners are losing anchors, many analysts perceive this is a positive for REITs. "We expect the far above-average strength of these malls to translate into significant net upside opportunities for the mall REITs, particularly from lifestyle or mixed-use expansion opportunities, at yields well in excess of going-in acquisition cap rates," says Paul Morgan, an analyst for Friedman, Billings, Ramsey & Co.

Simon Property Group, with the largest number of closings, 18, already has a $1 billion program to redevelop properties with mixed-use components. Whether, it will redevelop any of the empty Federated spots remains to be seen. "We have already initiated conversations with a wide range of potential users that are interested in stores that might become available," says Rick Sokolov, Simon president and chief operating officer. "We are confident that we will find quality replacements."

However, redevelopment into mixed-use is a strong possibility at three of the properties it fully owns, according to previous statements by David Simon, chief executive. "If we get back department stores, the highest and best use would be high-rise residential towers," Simon said at a Smith Barney REIT CEO conference in March.

Demand for the empty spaces will be especially fierce in markets with limited available land, such as Southern California or Boston. Possible anchor replacements range from traditional mall stores JCPenney to big-boxes such as Target or Wal-Mart or, possibly in the case, of Simon, high-rise condos.

Since most of these closings are at stores where another Federated/May store already exists, Federated may be unwilling to give the space it owns to a direct competitor, says Bob Sheehan, vice president of research for Boston-based Finard & Co. "I don't think Federated as a rule will want to bring in a direct competitor if they don't have to," says Sheehan. "If they can bring in Dick's as opposed to Nordstrom, they may go to that route. If there is a financial reward to go with Nordstrom, however, that may be the case."

Nordstrom's will likely take a look at the six locations set to close in the Boston area; a region the high-end retailer has targeted for expansion. Other replacements in Boston-area malls could be big-box tenants such as Target or Dick's.

Mall owners who take the space themselves and split it into additional shops, could charge up to $40 to $50 a square foot, says Sheehan. "I don't think they will have much trouble selling that space. There are a number of very realistic opportunities."

-- David Koch