‘Implausible’ Retail to Warehouse Conversions Emerging

Shuttered retail real estate assets can find new life as warehouses and e-commerce distribution centers, reported CBRE, Los Angeles.

CBRE studied 24 such conversion projects across the U.S. It found different types of retail-to-warehouse conversions including demolition of obsolete malls to be rebuilt as warehouses in Baltimore, Atlanta, Chicago, Detroit and several markets in Ohio. Other retail structures stayed standing and were repurposed for industrial uses, including a former Toys ‘R’ Us in Milwaukee now occupied by a business that remanufactures transmissions and Sam’s Club’s conversions of several of its stores to distribution centers.

“In nearly every market in the U.S., there are sites where this kind of repurposing could work, at least on paper,” said CBRE Global Head of Industrial and Logistics Research David Egan. “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.”

The conversion trend is growing but remains a niche play in the industrial-and-logistics real estate market, CBRE said. Still, it draws momentum from ongoing factors in each industry: demand for warehouse space is so strong right now vacancies are at or near historic lows in many markets.

Meanwhile closures by national big-box retailers and department stores have created opportunities in many cases for nonretail uses to move in.
Factors favoring retail space for conversion include many retail centers’ prime location, often at busy intersections or highway interchanges. Site access represents another advantage. Standalone big-box stores often include backend docks with easy access for trucks and the high ceilings needed for distribution uses, the report said.

Most importantly, some retail spaces simply are currently available while most industrial properties are occupied at the moment. CBRE said most of the conversion projects it analyzed are in markets with sub-5 percent vacancy for industrial real estate.

“These types of conversions were once unthinkable, and now they’re not only happening, they’re gaining traction,” said CBRE Americas Industrial and Logistics Leader Adam Mullen. “That industrial uses can overtake what are usually higher-rent uses illustrates the strength of demand for industrial real estate, especially last-mile distribution centers.”

The biggest impediment CBRE found to conversions: retail centers are frequently 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,” the report said. “Any landlord looking to convert their center also would need the approval of their lenders, city officials, neighbors and, in many cases, the center’s other retailers. Some might not appreciate the increased truck traffic and decreased shopper traffic.”