The trend of empty stores being converted to warehouses and ecommerce distribution centers is heating up, reports CBRE which examines in detail two dozen such projects.
The global industrial real estate firm examined 24 retail-to-industrial conversions since 2016 that turned 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 construction.
“These types of conversions were once unthinkable, and now they’re not only happening, they’re gaining traction,” says Adam Mullen, Americas Leader of CBRE’s Industrial & Logistics business. “That industrial uses can overtake what are usually higher-rent uses also illustrates the strength of demand for industrial real estate, especially last-mile distribution centers.”
CBRE found a wide variety of retail-to-warehouse conversions, including include obsolete malls rebuilt as warehouses.
Retail structures repurposed for industrial uses include a former Toys ‘R’ Us in Milwaukee now used for remanufacturing transmissions, and Sam’s Clubs that now are Wal-Mart 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 below 5% — indicators that elevate the value of industrial usage in locations that no longer support typical retail concepts.
Freestanding big-box stores closer to population centers than warehouse districts are the primary candidates for conversions; the retail structures typically offer dock doors, ample parking and clear heights compatible with industrial usage. Major retailers are choosing to expand their omnichannel platforms are transforming underperforming retail properties to e-commerce-driven logistics space.
While the trend remains a niche in the industrial-and-logistics real estate market, it draws momentum from ongoing factors in each industry. Demand for warehouse space is so strong that vacancies remain at or near historic lows.
Hundreds of store closures by national big-box retailers and department stores have created opportunities for nonretail uses to move in, a trend that is continuing.
“In nearly every market in the U.S., there are sites where this kind of repurposing could work, at least on paper,” says David Egan, CBRE 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.”
Retail space being converted include the prime locations which sit at busy intersections or highway interchanges. Another advantage: site access. Stand-alone big-box stores, in particular, offer backend docks and easy access for trucks. They also have the high ceilings needed for distribution uses.
Scarcity of available industrial space in the current economy is a major factor. Some retail spaces simply are available, which isn’t always the case for industrial properties in many markets, CBRE notes.
The primary impediment to these kinds of 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 needs approval of lenders, city officials, neighbors and the center’s other retailers. “Some might not appreciate the increased truck traffic and decreased shopper traffic,” CBRE admits.