CRE Adaptive Reuse in Action: From Retail Storefronts to Distribution Centers

 It is no secret that retailers have been hard pressed by the growing popularity of eCommerce.  With 40% of consumers making online purchases at least several times each month, the US retail landscape is now thought to be overbuilt by about 20%, with 4,000 stores shuttering in 2018 alone. The retail sector has adapted to accommodate changing consumer expectations by shifting toward experience-based shopping, producing seasonal pop-up shops, and increasing online product offerings. But those endeavors only go so far. According to Bisnow, there is now almost a billion square feet of vacant retail space, and cities, residents, and landlords are getting fed up with the empty storefronts.

Adaptive reuse of retail space is one way to leverage these vacant spaces and remain profitable amongst market pressure. Read ahead to find out!

 

Defining Adaptive Reuse

Adaptive reuse refers to the practice of taking existing buildings and repurposing them for a different use, while maintaining as much of the original structure as possible. Adaptive reuse differs from renovation in that the repurposed property serves a notably different function from the first. Because it utilizes existing structures, adaptive reuse can be up to 16% cheaper than new construction and take 18% less time to complete a project.

Many retailers are closing low-yielding brick-and-mortar locations and building their online presence to remain competitive in a rapidly evolving market. But what happens to these buildings? They can sit empty for years with no interested buyers, therefore not generating any revenue. Vacant properties are also linked to higher crime rates and declining property values. But thanks to adaptive reuse, some retail closures are making a comeback as eCommerce distribution centers.

Why Adapt Retail Space?

Retail locations that have shuttered due to poor sales performance are abundant, but that is changing as more retailers adopt an omnichannel approach, integrating their online and in-store sales offerings. In 2017, 32% of retailers let customers buy products online and pick them up in the store, while 75% allowed in-store returns of online merchandise (NRF). While some stores are staying open by accommodating eCommerce in addition to brick-and-mortar operations, others that have seen less storefront success are being transformed entirely into fulfillment and distribution centers.

Adapting existing retail structures into distribution centers has several advantages. First, it can help reduce freight cost and delivery time for retailers. With increasing consumer demand for shorter shipping times, this is an attractive option for companies looking to enhance their online sales while minimizing the cost impact of this transition. Next, adapting these structures costs less than ground-up building. These locations generally require little construction to be reused as warehouses, as they are already prepared in many ways to accommodate fulfillment needs.

Factors to Consider

Carefully weigh the pros and cons of adapting retail spaces in your regional market. While not all factors are universal, there are some considerations that apply more broadly, and these can help you decide whether adapting an existing retail property will be profitable.

Tenants

Because the retail sector is evolving to accommodate eCommerce, you are likely to be working with the same companies as tenants. This may relieve occupancy concerns as these companies have an ongoing need for distribution and fulfillment regardless of foot traffic and local customers. It may be mutually beneficial for you to renegotiate existing contracts with retail tenants.

Square Footage

Not all retail buildings are suited to this kind of adaptation. Some are simply too small to function in a warehouse capacity. Department stores or shopping malls are more suitable, but the cost must be weighed against the potential ROI.

Demand

If you’re generally focused on the retail market niche, do your research before jumping into a warehouse conversion. Assess the localized market dynamics in this asset class to make sure your property won’t be sitting vacant.

Capital

Because this is uncharted territory, it may be difficult to fund this type of project due to investor trepidation. Reassuring investors requires communicating transparently and explaining why this is a sound and likely profitable investment decision. Leveraging investor management technology like Investor Dashboards to present this offering could be advantageous, allowing investors to see details of the property at a glance and to commit capital directly.

Adaptive reuse of retail spaces as distribution centers is one of many ways that vacant properties in this sector are being revived. These spaces also often serve second lives as pop-up shops and retail theaters, or are converted into restaurants. While this type of project isn’t for everyone, it is an example of how creativity and adaptability can lead to favorable returns.

For more information on adaptive reuse in CRE, check out Adaptive Reuse: What to Do with Vacant Commercial Property