Retail-to-Warehouse Conversions Gain Momentum

Fall 2019 Issue
By: Ron Derven
As communities across the country struggle to find new uses for shuttered shopping malls, real estate professionals are starting to convert them into industrial facilities. \u003cem\u003eGetty Images\u003c/em\u003e

When other efforts to resuscitate a dying shopping mall fail, converting the facility to a warehouse or last-mile distribution center is an option to consider.

While the media focuses on retail store closings and the demise of brick-and-mortar locations, smart developers and mall owners at top-tier properties are working to replace bankrupt anchors and those oh-so-yesterday mall concepts with restaurants, experiential venues and, yes, new retailers.

For other malls, however, replacing failed anchors and shuttered stores has been more difficult. According to Ray Hartjen, director of marketing for RetailNext, a retail analytics firm in San Jose, California, brands that wanted to expand into new markets in the 1970s and 1980s had three main choices: create a catalog, build a call center or open a new store. Most chose to open stores, which in turn spurred the development of new shopping centers and malls. Some of those malls were built in areas of the country that today do not have enough foot traffic to survive as originally configured. These malls now need to be repurposed, perhaps as educational institutions, medical facilities, offices and/or housing. Others need to be closed.

One solution for underperforming malls is converting them into warehouses and distribution centers to fill the demand for last-mile delivery from e-commerce players and surviving brick-and-mortar retailers.

Retail-to-Warehouse Conversions

According to January 2019 CBRE research, there are at least 23 retail-to-industrial projects that have commenced since 2016.

These projects are turning roughly 7 million square feet of aging retail space into 10 million square feet of new warehouse/industrial space, either by converting existing structures or by demolishing and replacing them with new buildings.

“When we started this study, we didn’t anticipate that we would find so many projects,” said Matthew Walaszek, a CBRE senior research analyst specializing in industrial and logistics. “Compared to the overall warehouse/industrial inventory, which is 14 billion square feet of space in the U.S., these conversions are a mere drop in the bucket. This retail-to-industrial activity, however, is definitely a niche market that is healthy and growing.”

Walaszek said he sees more mall-to-warehouse conversions coming.

“The U.S. is over-retailed compared to other countries,” he said. “In the U.S., there is about 23 square feet per capita of retail space compared to 17 square feet per capita in Canada and 4.6 square feet per capita for the U.K.”

He said that on the demand side, the fundamentals are there for the conversion of functionally obsolete shopping centers to a more productive use.

“Our research shows that big-box stores make the most sense for a warehouse conversion,” said Walaszek. “For example, take a Sam’s Club. The building features allow for easy application to a warehouse. The developer only needs to make small changes to the interior and of course add racks, shelving, pallets and the proper technology. A shopping center is more complex to convert with the segmented interiors, multiple floors and other features such as escalators and inadequate docking. Shopping centers make more sense as a teardown and rebuild.”

Across the country, clients are asking for space closer to customers.

“Clients are interested in infill locations,” said Tray Anderson, logistics and industrial services lead, Americas for Cushman & Wakefield. “They are interested in improving their services to customers.”

What is a Good Candidate for a Warehouse Conversion?

Not every dead or dying mall is ripe for conversion to a warehouse. Bil Ingraham, senior vice president for business development with Centennial in Dallas, which owns 7.3 million square feet of retail space at seven properties across six states, said it is prudent to consider retail-to-warehouse uses if there is a strong demand for warehouses in the area and if the financials for such a conversion are stronger than for other uses.

“Malls are typically sitting on Class A real estate — in many cases defining and anchoring the retail around them,” he said. “If all of that retail has closed or moved elsewhere, then conversion [to a warehouse] might make the most sense, especially if it’s situated right off major national highways.”

“A mall for conversion to a warehouse needs to be located in a land-constrained market like suburban Philadelphia,” said Curtis D. Spencer, president of IMS Worldwide, Inc., in Webster, Texas, who is an expert in logistics and industrial development. “If my local mall in suburban Houston were to become obsolete, developers would never be interested in converting it to warehouse space. They would simply walk across the street and buy vacant land for $5 a foot and start fresh. An obsolete mall in suburban Philadelphia, however, would likely have all of the infrastructure in place for a last-mile delivery facility — adequate parking for trucks, a ceiling probably 25 feet high and perhaps air conditioning.”

Getting Over Municipal Hurdles

As challenging as it might be to find the right mall for conversion, once that property is located, the next major issue might be to convince town and zoning officials — and local voters — that the project will benefit the community.

“The real sticking point is convincing local government that the local mall is indeed a zombie that needs action,” said Spencer. “If that mall can be converted to last-mile delivery — all or in part — huge benefits will flow to the city. The reality is that this type of conversion will actually cut traffic in the area, it will reduce air pollution, and it will bring in sales tax revenue if it is a last-mile retail operation.”

Perceived negatives that it will turn into a trucking hub are unfounded, according to Spencer. If there had been a Sears, Target and JC Penney at the mall when it was operational, there was a lot of truck traffic at night. In the new mall-to-warehouse conversion, there would be similar amounts of night truck traffic and less traffic in the day because fewer vans would be making multiple last-mile deliveries, compared with consumers in automobiles coming to shop at the mall.

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