By Casey McKeon, vice president of acquisitions for Heslin Holdings
The retail real estate sector continues to evolve as a variety of sales and lifestyle dynamics force big retailers to evaluate their brick-and-mortar footprint. With many reducing their number of physical stores, property owners and investors are faced with a multitude of challenges as they deal with the big vacancies left behind. Even so, many of the affected retail centers offer significant upside potential in the wake of a trend that could reap significant damage to this commercial real estate sector down the line.
The big-box “category killers” aren’t downsizing for any one particular reason. In fact, there are a variety of factors at play. One is the consolidation occurring among competitors. Once complete, a consolidation inevitably leads to a reduction in stores. Additionally, more and more sales are taking place online, with shipping direct from the warehouse to the consumer’s front door a more common model of product delivery. Big retailers have also begun to establish online product pick-up centers inside their store locations. Both of these delivery concepts reflect the increasing lifestyle trend toward immediacy and speed. But regardless of the delivery benefits to the consumer, they are changing the face of the sector’s real estate.
When big-box retailers leave significant square footage vacant in a center, owners and investors must initiate a plan quickly. Owners are challenged by the fact that the lease rent figures of the former tenant simply cannot be absorbed by the current marketplace. Oftentimes, an owner must retrofit the space, breaking it up into smaller spaces for junior-anchor type tenants more likely to engage in a lease. But this solution isn’t without its own issues, as the extensive space reconfiguration required is expensive, thus in many cases hard to make financially viable.
Adaptive re-use is often necessary to revitalize an abandoned big-box successfully. Reuse strategies and wholesale property redevelopment are required when the situation is financially difficult and site constrained. The feasibility test for these creative solutions includes a thorough examination of the trade area encompassing the property to ensure that a conversion to smaller mixed-use projects – potentially with a mix of retail, office and medical suites, for example - makes sense.
It is still unclear what the total impact of the big-box downsize effect will be on the retail sector over the next few years. There simply aren’t enough new retail concepts or expansion among existing brick-and-mortar retailers to absorb the incredible vacancies on the horizon. However, while the trend will be difficult to resolve on a large scale, there is still a silver lining for some. Many of these retail centers provide superb upside potential for investors skilled at value-add strategies. Because some of the big box closures are occurring in high-performing retail markets, the positive fundamentals back rehabilitation and adaptive re-use plans.
— Casey McKeon is vice president of acquisitions for Heslin Holdings, a commercial real estate investment and development firm seeking value-add opportunities in the western United States. Visit Heslin Holdings at www.HeslinHoldings.com and contact Casey at Casey@HeslinHoldings.com.