Architecturally, there's nothing compelling about the common big-box structure. Like an old refrigerator, it serves a purpose. But when it becomes obsolete, someone might take it off your hands for cheap. Chances are, though, it's going to cost you money to get rid of it.
Many boxes do get re-used, but usually at significant cost to owners. One retailer's space rarely fits another's needs due to varying space requires, as well as retailers' specific prototype standards.
Consequently, owners of boxes that go dark are confronted with several choices. They can decide whether to invest money to salvage the bricks and mortar, convert them to another retail use, retrofit them for another use or knock them down and start over. The decision depends on location, size and age of structure. Other factors to be considered include real estate attributes such as parking and accessibility, and market demand and demographics.
Empty boxes in strong retail locations usually are re-absorbed quickly, notes Jeff Moore, senior vice president in CB Richard Ellis' Anaheim, Calif. office. Ideally, the structure is a match size-wise for a new tenant, but more often than not an owner will have to shell out $30, $50 or more per square foot to renovate and/or reconfigure the space. This often involves cutting a large box up into two or three smaller spaces to accommodate retailers, whose space requirement is less than the former occupant.
Most Service Merchandise boxes were re-developed into two or three into smaller spaces for retailers such as Bed Bath & Beyond, Ashley's Furniture, Oasis Bedroom, Ross Dress for Less and Wild Oats Markets, says Greg Gunter, a consultant to Developers Diversified Realty — which acquired Service Merchandise's portfolio. Owner/developer Irwin Molaski, chairman of the board for Las Vegas-based Paradise Development Co., split up two 50,000-square-foot boxes. He reconfigured a former Best Products store into two 25,000-foot spaces for Copeland's Sporting Goods and Barnes & Noble, and a closed Home Place store into a 30,000-square-foot Bed Bath & Beyond and 20,000-square-foot DFW Shoes store. The projects cost $2 million each, but he says, “At the end of the day, we had healthy tenants in there.”
THE BOTTOM LINE
It can be cheaper to tear a box down and start over again, especially in a neighborhood short on retailers, says Everett Hatcher, principal at the Birmingham-based CMH Architects, citing a dark 85,000-square-foot Kmart across the street from Birmingham's River Chase Galleria that was reconfigured into three smaller boxes. “But if there's no takers, you can't make the economics work,” he says. “That's why there are so many vacant boxes sitting around.”
Industry experts say medium-size boxes — with floorplates between 35,000 and 90,000 square feet — present the greatest challenge for re-tenanting and reconfiguration, because most users require more or less space and the shape makes them difficult to chop up into smaller boxes or shops. This size category is most often abandoned by retailers going bankrupt (i.e. Montgomery Ward, Service Merchandise and Kmart), shuttering failed merchandising concepts (i.e. Sears Home and Kids “R” Us), or moving to larger spaces to accommodate the new superstore concept and get a competitive edge, (i.e. Wal-Mart, Target, Kohl's, Home Depot and Lowe's).
Consequently, there are more boxes in this size group sitting around empty than any other, and the supply continues to grow. The number is likely to be exacerbated by category killers like Petco and office supply stores — which are downsizing their prototypical store sizes as they tighten up — evaluate the economics of various merchandise offerings and get back to their core business, according to James Rosenfield, national managing director for retail services and New York-based Cushman & Wakefield.
REDEFINING THE MALL
With owners anxious to re-tenant empty mall anchors, retailers traditionally located in stand-alone and community retail and power centers are moving into malls, along with an abundance of entertainment venues, blurring the lines between shopping and lifestyle center stores and mall retailers.
When Passco, a Los Angeles-based tenant-in-common retail owner/developer, bought the 1.2-million-square foot Puente Hills mall in Los Angeles, vacancy was at 50 percent and sales per square foot down to $75 per square foot. David Lemons, director of mall leasing for Passco, says that a former JCPenney store was split down the middle and Circuit City went in on one side and Burlington Coat Factory on the other. Since then, Linens ‘N Things was added, and an obsolete Broadway Department Store was torn down to make way for a movie theater complex.
The center's X formation allowed Passco to separate center components, with traditional mall stores in one area, power-center stores in another and restaurants and entertainment venues in still another area. According to Lemons, the center is now 92 percent occupied and sales per square foot have increased to $308.
Freestanding, rectangular boxes are the most difficult towith from an architectural point of view. CMH's Hatcher says a medium-sized box is normally 100 feet to 150 feet wide and 125 feet to 200 feet deep, which is usually not enough storefront for several smaller boxes and too deep to fit multiple stores into without losing a lot of space. Sometimes owners are willing to cut off the front or back of a box to create a shallower space for smaller boxes or reconfigure at box into a strip center, says Roy Higgs, principal/CEO of Boston-based architectural firm DDG.
Higgs notes that a large box in Severna Park, Md., was converted to a mini power center, with a Kohl's, Old Navy and Office Depot. But, some owners also are finding creative uses for the extra space. Henry Finkelstein, a real estate attorney in the Los Angeles-based law firm of Greenberg Blusker, notes that an owner in the Westchester area of Los Angeles converted a large box to a strip center and used the extra space in back for mini storage.
If the location is marginal, the building may be converted to an alternate use or the site might be rezoned to allow the structure to be replaced with something else entirely. Moore notes, for example, that a K-Mart site in Orange County was rezoned to residential use and the structure demolished to make way for apartments. “The Kmart site was more suited to residential than retail use, so this was a higher and better use for the land,” he explains, noting that rezoning the property to residential increased the value of the land from $15 per square foot to $30 to $40 per square foot. Additionally, two Kmart stores in Bonita, Fla., were purchased by Lee County and converted to schools. Molaski ended up scrapping a former Service Merchandise site in Las Vegas and donated it to the county for a park.
CASHING IN ON ‘WHITE ELEPHANTS’
But some retailers don't require prime locations with high visibility or extensive renovation to fit into an existing space, notes Jack Thompson, a principal and Southwest Real Estate Advisory Practices Leader at Ernest & Young'soffice. In fact, he says, some companies, like Jo-Ann Stores, Burlington Coat Factory, Hobby Lobby and Big Lots “have built their development strategy on dark spaces.
It's a good use, it saves a lot on costs like rent, the owner gets a tenant in, and the community has one less eyesore. I like to see that.” Molaski, who re-tenanted another former Home Place store with a Jo-Ann's fabric store, says that the conversion was fairly simple, costing about half of his other conversions. Less desirable retail spaces are also being utilized for recreational uses, like fitness centers, racquetball courts, mountain-climbing facilities and skateboard parks, notes Higgs.
No one knows for sure how many dark big boxes dot the American landscape, but the number is obviously sizable, with a number of retailers dropping out of the marketplace entirely and others downsizing or moving on. Service Merchandise had 227 stores nationwide when it filed for bankruptcy a year ago, and Montgomery Ward had 250 stores when the company bit the dust.
While still operational, Kmart shuttered more than 600 stores during the past couple of years and put another 317 on the block, and Toys “R” Us closed 64 stores last year and plans to close another 146 of its freestanding Kids “R” Us and 36 Imaginarium stores. Add to that the number of grocers closing under-performing stores or being forced out of the market entirely; national and regional retailers, including department stores, losing ground or downsizing; and those growing bigger or seeking better, more convenient locations, and the picture begins to grow pretty dim.