Warehouse conversions are far from a distressed retail silver bullet
Many questions have been presented to the commercial real estate community in recent months. How to keep occupiers safe, where to invest in a post-Covid-19 world, and how to know which tenants might default are all important considerations that many are wrestling with. But one of the most impactful decisions, for both a real estate portfolio and our actual communities, is what to do with the glut of shattered, shuttered retail space left sitting empty on street corners and in malls the country over.
America has long been over-supplied with retail space. As the Lincoln Institute think tank points out, the U.S. has 24.5 square feet of retail property per capita, compared to the European average of just 4.5 square feet per capita. Such a glut of supply makes the American market much more rapidly impacted by disruptions like the Covid-19 pandemic. This bears out in the numbers of American businesses closed due to the outbreak: over 160,000 at the end of August, according to data from Yelp.
Once these businesses close, retail buildings are left dealing with the vacant space left in their void. Finding another retail tenant in this environment is a difficult proposition, so many owners have looked at the possibility adapting these spaces for different uses. Predicting which uses that these properties are best repurposed towards is by now a familiar topic. We’ve made several comments on it ourselves. Familiar candidates include event space, food courts, or similar dining concepts, or other experiential retail options.
In another line of reasoning, oft-discussed by real estate companies, adaptive reuse evangelists are quick to point out the potential of big box stores and malls to be repurposed into warehouse space. Even before Covid-19 put all-new stresses on the nation’s delivery infrastructure, big internet retailers were working hard on improving their warehousing and delivery systems. And now, things are heating up even more. JLL reported earlier this year that half of its industrial leasing activity was going toward space related to ecommerce, and that total warehouse space will grow by a billion square feet by 2025.
This can make it tempting to view retail conversions to warehouse space as an exceptional opportunity to kill two birds with one stone, tapping a strong demand for industrial property while capitalizing on the distressed pricing currently seen in the retail world.