Study Finds Retail Closures Yielding Attractive Industrial Opportunities
The retail industry was already undergoing a dramatic evolution pre-COVID. The coronavirus crisis has only exacerbated retail’s need to adapt. Now, we’re starting to see that evolution take root as retail properties are increasingly being repurposed as warehouses to support e-commerce distribution centers.
Just last year, it was projected there were 24 such conversion projects across the U.S. Just through the middle of 2020, these has been 59 such projects that have either been completed, proposed, or underway since 2017—a marked increase from the year prior. These projects total 13.8 million square feet of retail space that is being converted into 15.5 million square feet of industrial space.
Research finds that various types of retail-to-warehouse conversions, including demolition of obsolete malls to be rebuilt as warehouses in Baltimore, Atlanta, Chicago, Detroit and several markets in Ohio. Other retail structures were left standing and repurposed for industrial uses, including a former Toys ‘R’ Us in Milwaukee now occupied by a business that remanufactures transmissions, and Sam’s Club’s conversions of several of its stores to distribution centers.
The conversion trend, while growing, remains a niche in the industrial-and-logistics real estate market. Still, it draws momentum from ongoing factors in each industry: Demand for warehouse space is so strong that vacancies are at or near historic lows in many markets. Meanwhile, though the broader retail market is healthy, closures by national big-box retailers and department stores have created opportunities in many cases for nonretail uses to move in.
Location An Advantage
Factors favoring retail space for conversion include the prime location of many retail centers, which often sit at busy intersections or highway interchanges. Another advantage: Site access. Standalone big-box stores, in particular, offer backend docks and easy access for trucks. They also have the high ceilings needed for distribution uses.
Finally, some retail spaces simply are available, which isn’t always the case for industrial properties in many markets. Most of the conversion projects analyzed are in markets with vacancy of less than 5 percent for industrial-and-logistics real estate.
Gaining Consensus A Challenge
The primary impediment to conversions is that retail centers are designated for retail uses, by economics and by covenant. Many centers are encumbered by mortgages predicated on retail lease rates rather than traditionally lower industrial lease rates. Any landlord looking to convert their center also would need the approval of their lenders, city officials, neighbors and, in many cases, the center’s other retailers. Some mightn’t appreciate the increased truck traffic and decreased shopper traffic.
COVID Will Accelerate Trend
Real estate executives anticipate that the COVID-19 crisis will accelerate this trend. With more people staying home and shopping online, retailers will have no choice but to evolve. This will create additional demand for final-mile distribution sites to support e-commerce operations. Underperforming retail stores will be a natural target for these conversion opportunities.
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