By Globe St. Thursday, April 23, 2015

When Split-Use of Retail Doesn’t Pencil

SEAL BEACH, CA—A new trend for vacant big-box space has been to split it up among several users or retrofit to a smaller size, but adaptive re-use can be a more cost-effective solution, Heslin Holdings’ VP of acquisitions Casey McKeon tells We spoke exclusively with McKeon about the changes occurring with big-box retailers and some creative ways vacant space is being used. What is happening with the big-box retailers now?

McKeon: We are seeing the continuation of downsizing from the big-box retailers. Specifically, many of the “category killers” are revising their operating models and merchandising plans to accommodate a smaller and less-expensive footprint. This is a direct result of consolidation among same-category retailers, along with the efficiencies created by employing a two-pronged sales model that incorporates traditional brick-and-mortar sales while at the same time taking advantage of increased online sales, with product shipping directly from warehouse to customer or in some cases locating online product pick-up centers inside the store. How are retail owners dealing with this change?

McKeon: It’s a challenge, to say the least. Many of the lease rent figures that the big-box retailers executed simply cannot be absorbed by the market. Compounding the problem is the extensive and expensive remodels required to split/retrofit the buildings to deliver a size that is more appropriate for the smaller, more-efficient replacement tenants. It’s very difficult in many circumstances to make it financially viable. Adaptive re-use is often necessary to make revitalization of an old box work. What are some creative uses and solutions you are seeing to help absorb this space?

McKeon: In some instances, the solution is an old-fashioned remodel, demising and re-tenanting plan. In other, more financially difficult and site-constraint circumstances, adaptive re-use strategies and wholesale property redevelopment and repositioning are required. This also depends on the trade area where the property is located, where conversion to smaller mixed-use projects with a combination of retail/office and medical suites, for example, make more sense. Where do you see this trend heading if more big-box retailers continue to close a significant number of stores?

McKeon: It can’t end well. There simply aren’t enough new retail concepts or enough existing retailers expanding to absorb all the potential square footage that will be left vacant. However, some of these big-box closures are happening in strong retail markets. These centers, though abandoned by the big retailers, boast positive fundamentals and are ideal targets for investors employing value-add and adaptive re-use strategies.

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