Retail-to-Warehouse Conversions Are Real

By David Sparkman

Empty stores and shopping centers are increasingly being converted into warehouse and e-commerce distribution centers, according to the global industrial real estate firm CBRE, which examined in detail two dozen such projects ranging from southern California to Baltimore.

The report covers 24 retail-to-industrial projects that have commenced since 2016, turning 7.9 million square feet of retail space into 10.9 million square feet of new industrial space, either by converting the existing retail structure or replacing it with new industrial construction on-site.

CBRE found a surprisingly wide variety of retail-to-warehouse conversions. The projects include the total demolition of obsolete malls to be rebuilt as warehouses in Baltimore, Atlanta, Chicago, Detroit and several markets in Ohio.

Other retail structures that were left standing after the retailers closed their doors also have been 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 12 of its stores to distribution centers.

These projects are predominantly located in areas with a median household income below the national average and in markets with industrial vacancy rates that are below 5%. CBRE says these are indicators which elevate the value of industrial usage in locations that no longer support typical retail concepts.

Freestanding big-box stores closer to population centers than they are to warehouse districts are the primary candidates for such conversions. These retail structures also typically offer dock doors, ample parking and clear heights compatible with industrial usage. Major retailers who are choosing to expand their omni-channel platforms are transforming underperforming retail properties into e-commerce-driven logistics spaces.

Larger-scale vacant retail properties, such as regional malls and community centers, are more often purchased by industrial developers and then demolished to be replaced by new industrial construction that is designed to meet the physical requirements of prospective space users.

The Trend Is Still a Niche

The conversion trend, while growing, remains a niche in the industrial-and-logistics real estate market, CBRE admits. However, it is drawing momentum from ongoing factors in each industry. Demand for warehouse space is so strong that vacancies have been at or near historic lows for some time in many markets. Meanwhile, although the broader retail market is healthy, hundreds of store closures by national big-box retailers and department store chains have created new opportunities for nonretail users to move in.

“In nearly every market in the U.S., there are sites where this kind of repurposing could work, at least on paper,” explains David Egan, CBRE’s global head of industrial & logistics research. “But many conversions are more challenging to execute than it might seem, given that the developer-owner of each site often needs to get a wide group of stakeholders to agree on a fairly dramatic change.”

Factors favoring the targeting of retail space for conversion include the prime locations of many retail centers, which often sit at busy intersections or highway interchanges. Another advantage is 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, the company notes.

Some retail spaces simply possess the advantage of being available, which isn’t always the case when it comes to industrial properties in many markets, CBRE points out. This is why most of the conversion projects that were analyzed by CBRE are located in markets with vacancy rates of less than 5% for industrial-and-logistics real estate.

The company says the primary impediment to these kinds of conversions is that retail centers are designated for retail uses, both 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 might not appreciate the increased truck traffic and decreased shopper traffic,” the company admits. The retail-to-industrial conversions also can face challenges on an individual-site basis from competing uses, zoning restrictions, and increasing land and construction costs.

“These types of conversions were once unthinkable, and now they’re not only happening, they’re gaining traction,” says Adam Mullen, leader of CBRE’s Americas industrial & logistics business. “That industrial uses can overtake what are usually higher-rent uses illustrates the strength of demand for industrial real estate, especially last-mile distribution centers.”

This article provided by NewsEdge.