Investors and developers around the country are seizing the opportunity to transform retail properties into other uses through adaptive reuse. This trend had been growing in the years before the pandemic hit and was accelerated by the effects of government mandated restrictions and economic uncertainty. In the recent past and for the foreseeable future, larger retail properties may continue to offer opportunities for redevelopment into facilities such as distribution centers, self-storage, offices/business centers, medical office space, or new retail concepts and recreation.
Distribution Centers
One of the most interesting trends in the market is the conversion of retail space into distribution centers. Amazon is a key player who has been in the news for buying all sizes of retail centers and converting them into distribution centers. From big box to smaller strip centers, Amazon is finding ways to utilize these perfectly located properties. According to Coresight Research, Amazon converted about 25 shopping malls into distribution centers between 2016 and 2019.[1] In addition, Amazon is being creative by encouraging customers to drop off their packages at “convenient and safe locations” in strip centers. They are also using Kohl’s as a retail location. Malls are generally built-in strategic locations that make it easy for the local population of shoppers to access it. This ease of access is also what makes malls great properties to purchase for a logistics purpose – they’re in a location that generally offers quick access to main travel routes and is closer to consumers. Amazon is continuing its redevelopment trend into 2021 with plans to convert malls in Baton Rouge, Knoxville, and Massachusetts into distribution centers ranging in size from 3.4 million square feet to 121,000 square feet.[2] Additionally, in Tri County, Ohio, three mid-box retail buildings were combined into a last-mile distribution facility. Two of the former tenants were K&G Fashion Superstore and Best Buy.
Self-Storage
Along with distribution centers, investors and developers are buying and repurposing big box stores into self-storage properties. According to a Wealth Management article, self-storage facilities need to be in areas with high traffic and great visibility, which is exactly what retail provides. Additionally, the conversion of old retail space into self-storage is generally cheaper than building new self-storage space. This lower cost helps make the financials work for self-storage owners who may have a low ceiling on the amount of rent they can charge per month for storage space.[3] In the Cincinnati metro area, CubeSmart is converting old office buildings into self-storage properties in Newport, Kentucky; Mount Auburn, Ohio; and in the Over-the-Rhine neighborhood of downtown Cincy. In Battle Creek, Michigan, the old Lakeview Square Mall is seeing new life due to an adaptive reuse plan for several buildings. The former Macy’s space will be converted into roughly 100,000 square feet of self-storage with a small packing materials sales area.[4]
Offices/Business Centers
Struggling retail locations are also ripe for conversion into office space. Developer Northwood Retail has been converting retail spaces into offices. One of its projects is called W4, a 4,439 square-foot repurposing of retail space in the Domain Northside mall in Austin, Texas. Some of the benefits for the tenants that Northwood Retail cited include amenities like nearby restaurants, private entries for both clients and employees, private outdoor space, and abundant free parking.[5]
In Daleville, Indiana, an old retail center was transformed into a business center with offices and some retail amenities. The Heartland Business Center at 9401 Innovation Drive now holds Ontario Crop, Sherry Labs, First Merchant’s Corp, Boyce Forms/Systems, and Komputrol.[6]
Medical Office Space
Offices of doctors, chiropractors, dentists, and urgent care clinics have been moving into former retail spaces for a while. Retail strip centers are very popular for medical office users due to the ease of access to and from the space, synergistic co-tenancy, and visibility. One downside of this is that buildout costs for the redevelopment of space could be cost-prohibitive. According to ICSC, tenant improvement costs per square foot can range from $100/square foot to about $50/square foot for urgent care clinics and physical therapy suites, respectively.[7] We discuss more of the considerations for placing health care tenants into former retail space in our blog here.[8]
In Fort Wright, Kentucky, a former Walgreens and Stein Mart were converted into The Christ Hospital Outpatient Center – Fort Wright. The former retail location offered great signage to I-71 and ease of access to and from the interstate from a nearby exit ramp.
Retail Conversion to New Concepts and Recreation
Retail is also being converted into other forms of retail. To fill larger vacancies and draw customers to benefit all tenants, several developers are adding bowling alleys and gyms, such as Planet Fitness, to their properties. This works for the tenant because the offered rent is generally lower, and the lower rents mean that many tenants can now get better locations that they previously could not afford. Even smaller retailers have added new concepts such as ax throwing. Recreation uses are becoming popular with owners because the traffic it creates makes it easier to lease other vacant space to traditional retailers.
In Mishawaka, Indiana, an empty JC Penney Home Store is up for conversion to a 36,000 square-foot showroom for a “high-end” electric car manufacturer. Locals believe this manufacturer to be Tesla, but this has yet to be confirmed. The Mishawaka city council approved the conversion in July 2021.[9] These showroom stores usually have no real inventory to minimize the square footage they need, which helps keep rent low. Customers then get to see and feel the product and place an order for delivery.
There are many opportunities to redevelop an idle shopping center. Converting one into a distribution center, self-storage facility, office space, medical office space, or different form of retail will take time and consideration. With more investors and developers recognizing the opportunity and trend in transforming retail space, retail properties in stellar locations will only be harder to find.
Thank you to Julie Pettypool, Bill Bussey, Andy Knapick, Bert Hehman, and Vee Kimbrell for contributing.
[1] https://www.nbcnews.com/business/business-news/amazon-snapping-disused-shopping-malls-turning-them-fulfillment-centers-n1262914
[2] https://www.nbcnews.com/business/business-news/amazon-snapping-disused-shopping-malls-turning-them-fulfillment-centers-n1262914
[3] https://www.wealthmanagement.com/self-storage/empty-big-box-stores-offer-opportunity-self-storage-developers
[4] https://www.bridgemi.com/business-watch/michigan-malls-transformation-macys-self-storage
[5] https://www.loopnet.com/learn/austins-w4-office-carves-out-creative-space-with-post-covid-advantages/1139167527/
[6] https://admrealestate.com/
[7] https://www.icsc.com/uploads/t07-subpage/Health-Care-Continues-Expansion-Into-Retail.pdf
[8] https://www.bradleyco.com/industry-blog/five-reasons-medical-tenants-may-be-good-for-retail-centers/
[9] https://www.southbendtribune.com/story/news/2021/07/07/mishawaka-council-oks-zoning-change-high-end-auto-dealership/7878792002/
