ACRE Big Box Retail Update Recap
Change is inevitable and this fact is most evident in the Big Box Retail marketplace. By no means does this indicate retail is dying though. Nor does it imply the current, and approaching, changes are necessarily negative. Rather, this change is poised to revitalize large-format retail, and usher it into a new, more prosperous era.
The key to surviving, and more importantly prospering amidst change, is adaptability. And that was the theme of ACRE’s recent Big Box Retail Update at the Grand Events Center in Long Beach this past Tuesday. The prestigious panel, moderated by Chris Gentzkow of Gentz Commercial, included Scott Fawcett of Marinita Development and Peter Moersch of the Irvine Company, two successful developers with key Big Box Retail holdings; Scott Burns of JLL, a successful broker representing several Big Box Retailers, including Seritage (a major holder of Sears + Kmart leased properties); and Chris Kiehler, the West Coast + Midwest real estate representative for Burlington Stores Inc. (formerly Burlington Coat Factory), one of the nation’s largest off-price retailers. These industry professionals convened to discuss how developers, landlords and tenants must adapt in the current environment of inevitable change.
As tenants either “right-size” locations or completely shutter stores, redevelopment is a fact of life in the shifting Big Box Retail environment. And this change isn’t necessarily a bane to developers: “redevelopment is faster than ground up and generally costs less,” according to Marinita development’s Scott Fawcett. “And there are no zoning or permitting issues, and far fewer impact fees because the improved property is existing,” Fawcett adds. But redevelopment projects often include “unexpected costs” Fawcett warns that many older buildings often require roof replacements, new HVAC installation, and asbestos removal and further stated“$100,000 in required improvements can eat up all the profits on a deal.”
However, redevelopment isn’t always the best option to replace Big Box vacancy. Irvine Company discovered this circumstance when faced with absorbing the vacancy left by a departing Macy’s at the Irvine Spectrum open air mall. “Based on the footprint and potential replacement tenant interest, we were far better off tearing down the building and replacing [the Macy’s box] with smaller shop space,” says Irvine Company’s Peter Moersch. Clearly a prudent move, considering most of the 20 spaces scheduled to open in 2018 are “already pre-leased” according to Moersch.
Subdividing and re-leasing vacated Big Box space is a growing practice, according to JLL’s Scott Burns, who currently represents Seritage. “Seritage has re-leased approximately 3 million square feet to non-Sears tenants” Burns says. And further indicates plans to, “carve up space and re-lease to smaller tenants, including Burlington Stores Inc.” Burns also notes since 2008’s Great Recession, “flight to quality” is driving the market, with most replacement tenants primarily interested in well-located, heavily populated urban locations.
On the tenant side of the Big Box equation, “internet proof businesses,” such as “off-price” retailers are still active, and in many cases, expanding. Burlington Stores Inc. has 50 deals in negotiations in California and the Midwest, and plans to open 45 stores nationwide in 2017. But, these tenants are seeking the most “bang for their buck.” “We’re looking for Main & Main locations, low-end of, or even below, market rents, 10 year deals with options, and co-tenancy with other off-price stores – TJ Maxx, Steinmart, etc…,” Chris Kiehler says of Burlington Stores Inc.’s current expansion plans.
Creativity is critical in adapting former Big Box spaces to the needs of smaller, off-price retailers, according to Kiehler: “we took over a former Mervyn’s in Alhambra, assumed 5,000 square feet on the ground floor, took the entire second floor, and basically wrapped around a Sprouts Market on the ground floor.”
Entertainment-oriented tenants are also highly active consumers of former Big Box space, Scott Burns notes. Specifically, the growing trend of “full-service luxury movie theaters,” as Peter Moersch terms theaters offering roomy, lounge seating in screen rooms along with food and alcohol service.
Mixed-used redevelopment is another oft touted solution for absorbing Big Box vacancy. And in many cases, office space or residential units are a more productive use for former Big Box retail space. But there are mitigating factors in undertaking such developments, “CC&Rs [attached to the original development] often limit space to retail use” says Peter Moersch. And while those CC&Rs will eventually expire, intensive study of highest and best use is critical to ensure “retail really is the best use,” Scott Burns cautions.
“The internet is changing the way we do business,” Peter Moersch says in summation on the current state of Big Box Retail. “Smaller locations that allow consumers to order online in-store and have items drop-shipped to their homes,” rather than stores with expansive inventory may be the future of retail, Moersch theorizes. Scott Burns echoes this sentiment, noting “groceries stores are here to stay,” while the rest of the retail landscape is clearly in a state of flux.