Posted on November 2, 2021 · Posted in Industrial / Flex, Investments, Retail

With the retail sector facing challenges stemming from e-commerce — which is consequently helping fuel the white-hot industrial real estate market — struggling shopping centers and empty big boxes seem like obvious candidates for warehouse conversions.

Retail properties are frequently in high-traffic locations close to customers, increasingly appealing for e-commerce and other tenants that want to meet consumers’ expectations of fast shipping. Retail centers also usually feature big parking lots and box-like configurations, similar to warehouses. But converting retail properties to industrial is frequently hard to pull off. They’re also by no means mainstream yet.

Cushman & Wakefield PLC in a report late last year found retail-to-warehouse conversions remained a small portion of the overall amount of new industrial deliveries. Between 2016 and late 2020, there was 1.4 billion square feet of new industrial supply, of which 1.2 billion square feet was logistics-related, Cushman found. Retail-to-warehouse conversions accounted for 1.2% of total industrial deliveries and 1.3% of new logistics supply.

CBRE Group Inc. found 59 retail-to-conversion projects were completed, proposed or underway nationally between 2017 and June 2020, up from 24 in January 2019. Those projects encompassed about 13.8 million square feet of retail space that was converted to 15.5 million square feet of industrial, CBRE found.

Brennan Investment Group LLC, an industrial real estate developer based in Chicago, recently purchased a 223,438-square-foot shopping center in Colorado Springs, Colorado. That property, Rustic Hills Shopping Center, will be converted into a light-industrial logistics center in the coming months.

Already, Brennan has signed on a tenant: online food-ordering service DoorDash Inc., which will occupy a portion of the to-be-refurbished center. Some existing retail at the site will remain but much of the property will become logistics space.

“It’s become challenging to find sites for ground-up development, but an opportunity like Rustic Hills is sometimes even harder to come by,” said Brian Roach, managing principal for Brennan’s Mountain West region. “Elected officials in city or county governments that must approve zoning changes and other measures to allow a retail-to-industrial conversion are, at least right now, not largely supportive of such deals. Local neighborhoods frequently are opposed to the projects, too. Brennan embarked on a six- to seven-month campaign with local stakeholders before filing a rezoning for the Colorado Springs property to garner support. A lot of retail properties contain some infrastructure for truck deliveries but it’s sometimes no larger than a fire lane. The shopping center Brennan bought has a large truck court, unusual for most retail properties — but an important feature for industrial tenants.”

For Rustic Hills, timing might have also been in Brennan’s favor, too.

“Because of the age of this thing — it was a grocery-anchored center (built) back in the ’70s — people got tired of (it) languishing,” Roach said. “Locals weren’t necessarily excited about an industrial conversion, but wanted to see the property redeveloped.”

Logistics users aren’t the only ones angling for vacant retail space. Phoenix-based U-Haul International Inc. last week purchased a former 100,984-square-foot Kmart store in West Columbia, South Carolina, which it’ll convert into 700-plus indoor climate-controlled self-storage rooms.

In an email, Michelle Sullivan, U-Haul’s manager of corporate sustainability said: “The company has been repurposing buildings into new uses for years, starting with gas stations. Similar to e-commerce and other users, U-Haul is seeking to be proximate to customers. About 70% of more than 2,100 U-Haul-owned stores are adaptive-reuse projects. There is an abundance of available, vacant retail sites across North America in various sizes and layouts. Positioning stores within existing retail corridors meets our objective to quickly serve customers while providing added space for affordable self-storage and moving-supply retail.”

The cost to upfit a retail space into a U-Haul operation varies, based on age, structure and amenities within, she said. Some buildings need minimal conversion or updates, while others require a more extensive redesign to address, among other things, unexpected foundational improvements, code changes, or lighting or HVAC upgrades or additions.

 “The company has acquired and adaptively reused former service stations, retail stores, hotels, hospitals, commercial business space, warehouses and factories to convert into U-Haul stores,” said Sullivan. “What is clear in nearly all adaptive-reuse projects is that the cost to retrofit an existing building to meet our needs is less expensive than building from the ground up when considering both economic and environmental costs.”

Brennan is targeting tenants like e-commerce groups, flooring and HVAC suppliers, and other hybrid office-industrial type of users at the Colorado Springs property.

As more retail properties like Rustic Hills get redeveloped into industrial-style projects, Roach said he expects more local elected officials will buy in to the idea of dilapidated retail being converted into logistics space.

“The more that’s done, and they’re successful, you’ll be able to build the story up,” Roach said. “We all know that retail is going to take a different shape in the next 20 years. But I don’t know if many cities are really committed to the idea just yet.”

 

Source: SFBJ

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