The small independent movie theater on New York's Upper East Side couldn't compete with the multiplex chains nearby. So it wasn't a surprise when the theater closed its doors last year. What was a surprise, however, was the emergence not too long after of a Duane Reade drug store in the same oddly configured two-story space.

Enter through a narrow storefront, only 900 square feet. Where once moviegoers lined up to buy tickets, shoppers line up at a bank of check-out counters. Candy, cigarettes and cold drinks are placed for easy grabbing. Then take an escalator up to the second floor — where once there were two small screens — to buy drugs, beauty goods and other products in a 10-square-foot open space. “We did an incredible amount of work,” says Jerry Ray, senior vice president of operations. “The only thing we salvaged was an existing elevator.”

The New York-based chain spent more than $1 million to convert the space into an 11,000-square-foot store that's open 24/7. One of the biggest — and most expensive — challenges was filling in the sloped floor. Steel and concrete were added to raise the floor about four feet on one end to create a level surface. The cost: 30 percent of the total renovation budget. Another $300,000 was spent to install a second escalator.

But for Duane Reade, the extra costs made sense, says Ray. The location — on busy 86th Street between well-heeled Park and Lexington avenues — is prime New York real estate. The store, which opened in January, “is doing extremely well,” Ray adds.

Around the country, landlords are looking for other Duane Reades — retailers willing to spend heavily to turn a dead cinema into a money-making property. “The smaller four-plexes and eight-plexes got blown away by the new theaters,” says J. Todd Stoutenborough, a principal at Long Beach, Calif.-based Perkowitz + Ruth Architects. Since 1999, 13 different theater operators have filed for bankruptcy protection.

Although key players such as Regal Entertainment Group and AMC Entertainment Inc. have since restructured and continue to fuel new theater development, the industry as a whole is trimming down. Despite new construction, the total number of indoor movie screens in the U.S. dropped from a high of 36,448 in 1999 to 35,170 in 2002, according to the National Association of Theatre Owners. That number is expected to shrink to about 32,000 to 33,000 total screens over the next two to three years as operators continue to close older and under-performing locations.

COSTLY REPOSITIONING

An empty theater is a formidable — and costly — challenge for landlords. “There is quite an expense to return these boxes to a vanilla shell,” Wiener says. Unique theater features such as the sloped floors and lack of windows need to be remedied to suit other tenants. In addition, older movie theaters are often built with a narrow entryway or lobby that opens into a larger backroom space for the individual screening rooms. That design translates into minimal frontage space into a shopping center or street, which is a problem for other retail tenants. Duane Reade flies banners outside the entry to attract attention to the possibly overlooked storefront.

Renovation costs quickly add up for fixes such as leveling the sloped floor and ripping out sound walls. Even then, what is left is an interior space with a column-grid system that is unique to the theater. “To do all that in certain cases is cheaper than to tear down the building and put up a new one in its place,” Stoutenborough says.

Theater renovation costs typically run about $40 per square foot, about half the cost of a complete tear down retail redevelopment. In addition, most national retailers are reluctant to change their prototype to fit an existing theater configuration. But, like the Duane Reade example, there are exceptions.

CHILL OUT AT HOT SPRINGS

Simon Property Group, for example, converted an abandoned United Artists theater at Brea Mall in Brea, Calif., to a 13,000-square-foot spa, a branch of the Glen Ivy Hot Springs Spa in Corona, Calif. The theater in the 1.3 million-square-foot mall, anchored by Nordstrom, Macy's, Robinsons, JCPenney and Sears, closed in early 1999. When a deal with a Japanese restaurant failed, leasing agents and mall management considered several options.

Some of the more viable ideas included a nightclub, a sports club, a sporting-goods store and an upscale food emporium. To build on Nordstrom's high-end female customers, Simon decided to go with an upscale day spa.

Simon spent $158,000 to level the theater space, alter exits and fill in the theater's sloped floor. The electrical and mechanical systems required little change because the theater and spa had similar requirements. Existing theater walls were replaced with glass; skylights were added to maximize natural lighting.

“It has been an excellent addition,” says Robb Cox, vice president of leasing for the western region of Indianapolis-based Simon. Although Brea Mall has traditionally reported strong sales of about $500 per square foot, the spa has boosted traffic by 25 percent at that particular entrance, Cox says.

Theaters on prime real estate locations have an advantage. It's easier to attract tenants, who are willing to spend heavily for the renovation to an ordinary retail box or tear the theater down and start over again.

When a 20,000-square-foot theater went dark at the Family Center at Midvalley in Taylorsville, Utah, owner Developers Diversified Realty Corp. flattened the building and remarketed the property, which has a big selling point: It's visible from the interstate.

“Sometimes theaters lend themselves to reconfiguration, but as a rule of thumb these tend to be single use buildings,” says Tim Bruce, a senior vice president of development for Beechwood, Ohio-based Developers Diversified.

Last September, just nine months after the Cinemark Theater shut its doors, a brand-new two-level, 35,000 square foot 24 Hour Fitness gym was open for business at the 771,033 square-foot shopping center. “The health club in our center is great because it does create a strong draw,” Bruce says. And despite the cost of razing the former theater, the new gym delivered an 11.5 percent return, he adds.

“If it's a standalone theater with expensive real estate, owners are willing to do a teardown and put in another hot retailer such as Best Buy,” Stoutenborough says. A hidden bonus in converting a former theater to a retail use — either through redevelopment or renovation — is that the parking requirements for a theater are usually twice that of a retail use. So landlords can generate added revenue by reclaiming idle space to build either more retail space or create new pad sites, he adds.

The theaters that have closed — and are continuing to close — are predominantly smaller, outdated venues. Ultimately, the theater shakeout is creating opportunities for many landlords to breathe fresh life into a tired space and boost shopping center revenues in the process.

Duane Reade is so pleased with its rehab that, says Ray, it will consider converting other dark theaters in heavily-trafficked and underserved neighborhoods.