Retail real estate left behind by the retail industry’s evolution can find new life as warehouses and e-commerce distribution centers, as shown by a new report from CBRE, Los Angeles.
The report details 24 such conversion projects across the United States, and found 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 re-purposed for industrial uses, including Sam’s Club’s conversions of several of its stores to distribution centers.
The conversion trend remains a niche in the industrial and logistics real estate market. Demand for warehouse space is strong enough for vacancies to be at or near historic lows in many markets. Meanwhile, closures by national big-box retailers and department stores are creating opportunities for non-retail uses.
“In nearly every market in the U.S., there are sites where this kind of re-purposing could work, at least on paper,” says David Egan, global head of industrial and 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.”
Location becomes 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 is site access. Standalone big-box stores, in particular, offer backend docks and easy access for trucks and have the high ceilings needed for distribution uses.
Finally, some retail spaces 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% for industrial and logistics real estate.
Gaining consensus still 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 a center also would need the approval of 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.
“These types of conversions were once unthinkable, and now they’re not only happening, [but] they’re gaining traction,” says Adam Mullen, Americas leader of industrial and 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.”