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19 Apr 2019

Creative New Ways to Fill Prominent Big Box Retail Vacancies

This past Tuesday, I read an article in Shopping Center Business identifying creative opportunities for landlords to fill vacancies for medium and large retail big box stores. As an industry, it is becoming more common to seek out opportunities such as these.

The article, written by Alex Tostado, points out that the retail landscape looks very different than it did just a few short years ago. One of the most striking changes is the large number of medium and large boxes now standing empty. Every few months seems to herald the announcement of another major brand consolidating or announcing bankruptcy or significant closures. The shockwaves from the Toys ‘R’ Us shutdown are still reverberating across the industry, further highlighting the need for brokers, owners, investors and landlords to find new and creative ways to fill these empty spaces.

Not all vacant retail store fronts fit the bill for a self storage facility. In fact, many of these vacant store fronts are leased, further limiting the type of operator. Tostado does reference self storage as an opportunity though and offers some interesting points.

Rethinking "Traditional" Concepts

Tostado says the biggest storyline when it comes to backfilling large vacant boxes is the increase in non-traditional concepts that are taking advantage of these noticeable gaps in the commercial canopy to reach for their own patch of sunlight. This is particularly prevalent in secondary and tertiary markets, and in spaces on the fringes of more valuable commercial real estate.

The list of non-traditional concepts filling vacant big box spaces includes everything from indoor climbing centers and discount fitness concepts, to self storage centers. Co-working and meeting/office space concepts like WeWork and WorkBar are effectively backfilling vacant boxes also.

Not Every Size Fits All

In the article, Tostado explains that when an Eastern Mountain Sports vacates a 15,000-square-foot space in Newton, Massachusetts — to use a recent real-world example — the list of potential brands and businesses to backfill that space is not long. While there are some notable success stories out there — with the impressive and expanding constellation of TJX Companies (TJ Maxx, Marshall’s, Home Goods) being one of the prime examples — backfilling bigger boxes these days often requires a certain degree of flexibility and creativity.

Since the early 2000's, self storage has shifted into a retail business (location). With the increasing cost of real estate, developers are getting creative on how to acquire retail locations for development. These store fronts present an opportunity for the right self storage developer and operator.

In June 2018, an article was published in BusinessDen stating California-based The William Warren Group (StorQuest) filed plans to convert a former Kmart store in Englewood, Colorado, to a mixed-use space that would include self storage and retail. Kmart closed its 140,000-square-foot building in November of 2018.

The company was looking to convert just under half the structure, about 60,000 square feet, into a StorQuest Self Storage facility with a drive-in loading area.

Chuze Fitness, which operates gyms in Colorado, Arizona and California, signed on to occupy about another 40,000 square feet. The remaining 40,000 square feet would be marketed to smaller retailers and restaurants.

Jon Suddarth, vice president of real estate for William Warren, said the building is about 230 feet deep, and most retailers don’t want stores that stretch that far back.

For the self storage facility, “We don’t need the frontage, but we need the space, whereas the retailers need the frontage, but not the space,” he said.

Suddarth said Capital Pacific has a long-term land lease on the property and contacted William Warren shortly after Kmart decided to leave. He also stated the self storage component is the “economic engine” that would allow for the broader conversion of the building.

Potential Snags

Tostado says that it’s not all about creativity and opportunity. As intriguing as non-traditional big-box backfill candidates may be, the reality is that landlords and brokers will always be somewhat constrained by the quality of the real estate. While discount concepts have established a foothold even in more affluent areas in recent years, market conditions and the age-old real estate truism of location-location-location will still dictate your options to a large extent. In the case of self storage, this is so true.

It is also important to note that it’s generally much more difficult to fill spaces left vacant by traditional large department store anchors.

Challenges presented by the physical spaces themselves cannot be discounted, either. From ceiling heights to buildout requirements, the large size and specific dimensions of larger boxes can make renovations costly — or even cost-prohibitive. Some large boxes can be divided up into smaller spaces, but the ROI on that also needs to be carefully calculated. Obviously, the return on a vacant box is zero, and breaking up a large space into smaller pieces can sometimes open up the pool of candidates suitable to occupy the space. But depth is a common issue. A 130-foot-deep space can pose problems, and owners and developers are also leery about potentially creating common area space that they are going to lose rent on. This is exactly why StorQuest (self storage) was able to benefit from the Kmart site.

In closing, Tostado says that the bottom line, however, is that this active and frankly fascinating commercial real estate sector is only going to continue to become more relevant in the months and years ahead. There are more big-box closures on the way, and the turbulence of a rapidly evolving industry will continue to present plenty of opportunities for backfilling those spaces with new concepts and creativity.

My takeaway from Tostado's article is that as an industry, we are certainly presented with new and creative opportunities to develop. However, we also need to be cognisant of supply/demand. If we're not careful in how we plan for new development, our industry may find itself in a similar situation.