What is the future of big box retail?

We sat down with Paul to learn about the future of big box retail and some of the key steps for future-proofing big box assets for optimal results.

Tell me a bit about your outlook on the current retail landscape as it pertains to big box?

That is the question everyone is asking, and it is not an easy answer. Big box closures continue at an unprecedented rate and the ability to release has to do with the following:

The quality and location of the real estate.

Good infill urban real estate is generally much more leasable or adaptable to a change in use than suburban or rural empty boxes to refill. Retailers are reserving more capital for expansion in urban areas than suburban or rural areas.

The owners’ long- and short-term goals for their property.

If the goal is short-term, maybe a quick refresh and release to a discounter is in their best interest; or if it is longer term in nature a tear down and rebuild into a new box could be beneficial. A mixed-use opportunity, like adding a vertical component to the property to take advantage of high land values in urban areas could be a great option.

The availability of retailers not represented in the marketplace.

With the shrinking list of active and expanding retailers, some areas are overbuilt and there are few retailers not represented in the area. As the old saying goes, “there is a lid for every pot,” we just need to match the lid to the pot.

What advice would you give to an owner who is looking to lease or sell their vacant big box?

There are a lot of uses to consider. There are plenty of stories of closed boxes going for very creative uses. Almost every property type has ended up in a closed box – retail, office, municipal offices, hospitality, mixed-use, multi-family, industrial, storage, and in some areas even legal cannabis growth or retail has filled a box.

Each user will dictate the capital investment needed. In many instances, leasing to a discounter is the easiest option, but it may not be the best long-term option. The issue with long-term options is that the investor must be patient, as it could take years to achieve their desired return rate.

What are the first steps an owner should consider when seeking to fill vacant space?

With our highly qualified team within Development Services, we have seen many types and outcomes on redeveloping vacant big boxes. Sitting down with JLL and the team will help educate owners on options, so we can execute on the decision that best suits their needs.

There is no one answer as each property and owner is different. We may come up with an option the owners have not thought of. Sometimes tough decisions need to be made and often, partners, lenders and cities all factor into the decision-making process. Other decisions can be based on the owner’s desire for base rent versus a credit tenant, modified gross lease versus triple net lease, whether percentage rent is important and so on.

What are some of the possible tenant options for filling big boxes? Do they vary by urban, suburban and rural markets?

Urban areas have more appeal as there are more retailers interested in urban core due to demographics and densities there. In suburban and rural areas, discounters lead the way with Burlington, Ross, Marshall’s, TJ Maxx being the majority of soft good retailers expanding. Other uses like health clubs and bounce houses are also becoming more prevalent as they take space that others won’t, and they bring in foot traffic.

Again, the credit worthiness plays an important part of the decision-making process. The value creation of a corporate guaranteed lease versus a ‘mom & pop’ or regional operator can make a huge difference in the value of a lease.

What should an owner or landlord do to better position it for sale or lease?

Spruce up the space. Curb appeal and a cleaned-out box show better. Many people are not visual enough to see beyond the as-is box. Therefore, if the box is cleaned out and painted white, it allows potential users to visualize what they can do with the space. Start with clearing out the drop ceilings and partition walls and make the investment to fix the roof and HVAC systems. Often times, it may be difficult for a landlord to make these investments without a letter of intent or a real expression of tenant interest, but just like selling your house, you need to put your best foot forward.

Swiftness is key. Having a box you can deliver quickly can be the over-riding decision to land a tenant, especially if there is a competing site.

Assess the landscape. The high cost of construction is impacting some of the decision-making process. In California, for example, the shortage of skilled labor has caused construction costs to increase by 30 percent in the last two years. Many of the boxes are old and out of compliance. In this case, a tear down would be a more cost-effective alternative than a rehab. I have seen rehabs that cost more than a new building with all the unforeseen change orders, and when you are done, you still have a 40-year-old structure.

What does the future hold for big box?

Retailers will close if they can not compete with the internet and changing customer tastes and lifestyles. Some retailers are doing better than others. A rough “rule of thumb” is that high-end retailers perform better against the internet as those customers want and need service and selection. We also see the low end performing well, as the internet cannot compete on price. You can’t sell a tee shirt for $1.99 and deliver it. Product weight also matters. As my friend at Home Depot once said, “When the UPS truck has a lumber racks, I will get worried.”

And of course, the growing appreciation and desire for experience in retail is making way with customers returning to malls and shopping centers for the experiences they provide. For some things, the internet simply cannot compete. Retail is certainly changing, but here to stay.

There are few easy answers, but the Development Services team is committed to assisting our clients find their best answer.