Empty stores and shopping centers are increasingly being converted into warehouse and e-commerce distribution centers, according to real estate firms such as CBRE and Cushman & Wakefield. CBRE produced a report this past year detailing 24 retail-to-industrial conversion projects 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. One of the observers of this trend has been Bil Ingraham, senior vice president of business development at Centennial.
What is driving the trend of retail-to-warehouse repurposing?
It is being driven, broadly, by a decrease in demand for traditional consumer-facing retail and a rise in demand for warehousing due in large part to increased e-commerce transactions and the subsequent need for fulfillment. Certain retail real estate locations may no longer find themselves in the center of consumer-based activity. Often times these locations have lost their consumer-based retail appeal due to competitive market developments or the downturn in economic status for their primary surrounding trade area. Couple this with a significant increase in demand for e-commerce fulfillment, and if the location, zoning, and price is right, certain spaces may find themselves with a successful equation for retail to warehouse conversion. This is not an easy equation to solve. These properties would likely need to find themselves with very few, if no other, alternatives for traditional retail and they need to find themselves in areas where industrial warehouse demand is not only strong but ripe for growth. Only then does industrial warehousing become an opportunity for a property. That is why we have seen only a very small amount of these conversions currently.
How widespread is this trend?
While this trend is starting to emerge across multiple markets in the United States, it is still in its infancy and represents only a very small amount of gross leasable area within each of those markets, and there doesn’t appear to be any one market showing tremendous opportunity or growth within this arena so far, though Milwaukee seems to be making some headway around one specific defunct mall, and Ohio has a spate of activity from Amazon, which seems to have found success acquiring property from dead malls there that are well beyond repositioning. Opportunities, for the most part, have been very specific and small. Walmart, Target, Toys R Us, Sam’s Club, a small handful of regional malls are among the locations converted, or in process, to date.
Do these projects usually involve traditional malls that have failed?
To my knowledge these projects have more typically involved big-box conversions in community centers than traditional malls that have failed, and I would assume that is due to logistics and expense related to traditional mall conversion. Big-box tends to convert more easily as it delivers certain loading, height and other practical logistics required for warehousing versus traditional mall conversion which, to my knowledge, has thus far required a complete tear down and rebuild of the land. Even failing traditional malls tend to be the “anchor” of busy retail hubs across America and lend themselves to a more traditional type of repurposing that may yield higher returns and maintain a consumer-based vibrancy with value creation including multifamily, entertainment, dining, hotel and office.
What is necessary for this change in property type to succeed?
I suppose that would depend on what one considers a level of success. If faced with limited options for vibrant community redevelopment, then warehouse conversion may be the best alternative for land redevelopment, though it may not yield the returns of traditional retail, it certainly carries less risk and would be considered more successful than a blighted dead mall location.
Can you cite a couple of examples where retail-to-warehouse succeeded in a significant way?
I believe the Amazon fulfillment conversions would be considered a success for both Amazon and the municipalities, though that may be subject to some debate. Blighted land has been repurposed and jobs have been created, though the burden of repurposing seems to have fallen on the municipalities. It appears that a good number of these conversions arose out of distressed properties at auction or in bankruptcy and so would not, perhaps, be considered “successful” from a property owner standpoint, but in the eyes of a municipality that finds itself in the unfortunate position of repurposing blighted land, one might say these have been successful land-use conversions.