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Feature Article, November 2006
Breathing New Life Into Former Big Box Properties
Flexibility and patience are key to re-tenanting vacant big box facilities.
Steve Gozini and Steve Jaffe
Big box retail projects, like most other retail types, are in a constant state of flux. While all of retail endures the ebbs and flows of changes in the market, the big boxes seem to endure the lion’s share of reinvention. Due to their size, re-tenanting big boxes can pose a challenge both to the box owner and to the greater shopping center owner. Many of the big boxes, including pet stores, discount retailers, electronics and sporting goods retailers of the 1990s have disappeared, often dragging the rest of the shopping center down with them. But when these facilities close, they leave behind opportunities for profit in an interesting real estate market niche: the acquisition and leasing of vacant or partially leased former big box retail locations.
These opportunities are often overlooked by larger developers and owners. It takes a certain kind of investor with specific skills, resources and patience to take advantage of these value-added opportunities successfully. These properties are often unqualified for acquisition by individual investors, large institutional investors and REITs, which typically seek stable, mature assets with dependable and immediate cash flow.
Big Box Properties For Sale Nationwide
No single driver fuels the recent trend of big box properties closing their doors. The closures run the gamut — from retail giants to warehouse stores and supermarkets. All over the nation, as regional retail differences fade, there is an emerging similarity of such properties, presenting both challenges and opportunities. Mergers and bankruptcies play a key role. In some areas, demographics and market dynamics change, prompting retailers to seek new locations. Retail stores may follow the pull away from historic business core areas to more promising locations, such as in new developments adjacent to freeways. Some retailers may decide to leave a regional market altogether. Alternatively, reflecting the continual evolution of consumer tastes and demands, retailers who develop more attractive new prototypes for their stores may move to new sites not far from their former locations.
Transforming Undervalued Properties Into Profit Centers
As with any real estate transaction, the goal in reviving abandoned big box properties is to buy at an appropriate price and successfully turn the asset around in a cost-effective manner to yield a product that is responsive to the particular needs of the local community.
A key advantage of these properties is that existing buildings with full entitlements can be acquired at a much lower cost than it takes to build a new facility in today’s market. In dense urban markets such as San Francisco, where little room exists for new development, these properties can become valuable real estate.
There is no magic formula for the process of re-using big boxes, but we have found that flexibility, deep resources and patience are essentials for success. The greatest challenge is to determine what to do with the building. What worked for years for a previous tenant has suddenly changed, and the new owner has to invest time and ingenuity in waiting for the market to emerge or find the right new tenant to fit.
The successful buyer must be willing to buy quickly without having to identify a replacement tenant before closing. Further complicating the process is problematic acquisition financing — conventional underwriting standards will usually frown on a vacant big box with its negative cash flow. Capitalization is critical. With the capability to hold on to and carry a vacant or partly leased property for as long as 18 to 24 months, a buyer can seek potential users and try to anticipate the ways in which the market will develop.
Finding The Right Use For A Former Big Box Store
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A vacant Wal-Mart before re-tenanting.
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In leasing the re-used big box property, the first prospects to look at are the retailers who are similar to the former tenants. After that, flexibility is the key.
A good example of a big box reuse is the acquisition we made of a former Wal-Mart in Kennewick, Washington. This was a market where, given the local constraints on development, the big box would have many opportunities for re-use. While we believed in the asset, it took 3 years to find the tenants for the site. The success of the property depended on flexibility in finding new kinds of tenants and meeting their needs. Following its refurbishment, the building is almost fully occupied, including a tenant that is creating many jobs for the local community.
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BH Properties acquired a former Wal-Mart in Kennewick, Washington, and has leased it to several different tenants. The majority of the front of the building is leased to indoor/outdoor equipment and accessories retailer GI Joe’s, a call center is leasing the back one-third of the building, and the remaining space has been divided for smaller tenants.
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The Kennewick property reflected a typical challenge of big boxes: their extreme depth. Because the majority of retailers do not want depth of 350 to 400 feet (not atypical), owners may simply wall off the back part of the building, tear it down, or find alternative uses for it, such as storage. In an innovative solution, we first found a tenant for the back one-third of the building: a call center for a leading online retailer. The call center is a relatively large employer, requiring a lot of parking space. The majority of the front of the building was leased to indoor/outdoor equipment and accessories retailer GI Joe’s, and the remaining 30,000 to 40,000 square feet of space was divided for smaller tenants who satisfy different needs for the local market.
Community Issues Figure In Big Box Property Re-Use
Communities can present additional challenges to buyers of these undervalued properties. Vacant big box properties can become problematic for a community. Their visibility can create a perception that the area is not a good retail market. The absence of retail tenants interrupts sales tax revenues. Facilities can also become eyesores, inviting vandalism and trash dumping.
With a host of concerns, local communities often get involved to varying degrees in the big boxes’ re-use. Some can impose complicated or unrealistic requirements on buyers and developers, who must match the desires of the local communities with what is most practical and the best solution for an old location. Community demands can emerge as dominant factors in locations where there are certain restraints on development.
Success And Profitability In A Range Of Different Markets
Many of these vacant big box transactions are one-off deals, too small to interest larger investment companies who have no appetite for risk. As a nimble, niche operator in smaller markets, with the ability to close transactions fast, a specialist firm can acquire distressed, vacant and even stigmatized properties from different sellers and revitalize them successfully in different ways. To find the best opportunities, the buyer must to be looking for properties in several different secondary and tertiary markets that show promise. The important ingredient is the understanding that patience will be required for success in all of these types of acquisitions. That is where the opportunities lie.
Steve Gozini is president of Los Angeles-based BH Properties. Steve Jaffe is executive vice president and general counsel of BH Properties.
©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.
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