Retail Midwest

Adapt and evolve: Making the big decisions about big-box retail

Adapt and evolve: Making the big decisions about big-box retail,ph01
This former Kmart has been transformed into a U-Haul center. It’s just one example of how former big-box stores are evolving into new uses.

One of the defining features of the current retail real estate landscape in Southeast Michigan is the availability of mid- and big-box retail spaces. Depending on local market conditions and a range of other site-specific factors, there are viable options for filling those spaces—but not all of those options are retailers. Increasingly, adaptive reuse is becoming an effective and often necessary alternative.

Growing numbers of municipalities across the region are recognizing that they need to be flexible and embrace creative solutions to vacant retail boxes. Making the decision to go in a different direction is not always easy—and requires considering and accounting for a wide range of different factors.

Understanding the larger trends that got us to this point—and taking a closer look at what has and hasn’t worked when it comes to backfilling those larger retail vacancies—is an important first step in not only appreciating what the retail real estate landscape looks like today, but how it will continue to evolve in the months and years ahead.

A fundamental shift

The current state of the retail real estate landscape is the product of an ongoing trend that may have accelerated in recent years but has been ongoing for at least a decade: the continued shift in consumer spending habits. While competition from online vendors has not been the existential crisis for brick-and-mortar retail that some have predicted, there is no doubt that some features on the retail real estate landscape—both nationally and in Southeast Michigan—have shifted because of the rise of online and mobile sales. Consequently, there are simply some areas in almost every market with significantly more retail real estate spaces available than there are retailers to fill them.

The environment remains very rich for the best retail locations. Premium locations are arguably more valuable and desirable today than they were before the shift in consumer spending habits. Things change quickly once you move down the ladder, however. Second-tier locations can still work for some retail uses, but limited choices and low demand mean these are often good candidates for creative reuse. Some third-tier locations may be able to get by with creative reuse, but the hard truth is that at least half of them will never be occupied again.

A range of potential solutions

A number of recent deals across Southeast Michigan clearly show the range of potential options to backfill large retail vacancies.

In Detroit and Southgate, former Kmart locations have been taken both by traditional retailers like Kroger and creative reuse tenants like U-Haul. U-Haul has been an enthusiastic adopter of former Kmart spaces, continuing a national trend by purchasing assets in Southeast Michigan and across the country. Car rental and storage have a natural synchronicity, and it’s unsurprising that we have seen this concept spreading at the same time that the availability of affordable retail boxes has made these locations feasible.

Sometimes, dividing a large box into smaller spaces is an effective approach. A former Kmart location in Fenton, Michigan, has been transformed into four smaller retail footprints, set to be occupied by a Marshall’s and Michaels, among other new tenants.

The wide range of creative reuse options includes some surprising choices. Other recent Michigan examples include a former Sam’s Club being used as a boat storage facility. Light industrial is an increasingly popular option, with names like Flex-N-Gate taking a former Kmart space in Ionia, Michigan. Another Kmart in Alma, Michigan, is now home to Tractor Supply Co., alongside other additional retailers. A former Toys R Us in Westland, Michigan, is now occupied by a Volunteers of America secondhand clothing store.

The ticking clock

Realistically, making the right decision and securing a tenant needs to happen in a timely manner. You only have about 12 to 18 months from the time a building becomes vacant to the point where it starts to become a risky asset. With no tenant(s), the owner is paying taxes, insurance, maintenance and utilities out of its own pocket.

Security for these vacant buildings is a real concern, as many owners have discovered to their chagrin. In one recent example, a former retail big box space was under contract with a Fortune 500 company for reuse. The community turned down the potential reuse tenant to hold out for a new retail tenant to fill the space instead. Due to this delay, the facility remained on the market for too long and was eventually stripped by scrappers. All of the building’s copper was stolen, and the perpetrators did hundreds of thousands of dollars of damage to the asset.

With no HVAC and electric, the potential for mold issues is significant, and the property becomes much harder to sell or lease. For an owner, the prospect of spending $250,000+ on repairs with no guarantee of a return on that investment is daunting.

Moving forward

After three decades in this industry, I’ve never seen an environment like today. Communities have significantly more influence over the ultimate success or failure of the effort to backfill mid- and big-box locations. Some municipalities get it: They recognize that the market realities have fundamentally shifted, and they are willing and able to do what needs to be done with regard to any necessary zoning changes. Others are more reluctant, and continue to hold out for more traditional retailers, even when the odds of that happening are steep.

Making the “right” choice isn’t always easy. It can be tough to let go and accept that traditional retail isn’t coming back—especially when, in some cases, these are locations that have been home to retail for many decades. The good news is that most municipalities understand the market has changed. Owners also understand the role they need to play in communicating with civic and community leaders and advocating for smart and strategic market-based solutions.

To succeed in the current environment, retailers and retail real estate professionals alike need to be creative. Don’t depend on zoning ordinance books written before the Internet even existed, which certainly don’t reflect new realities. Municipalities should be open to listening and accepting good advice from expert consultants—ideally a local or regional name with local market insights.

While adapting to market realities is nothing new, it’s clearly more of an urgent priority today, when there are more conflicts with potential new uses and zoning parameters. Some of the best solutions today are nontraditional tenants and uses, tasking municipalities and real estate professionals with new challenges and exciting opportunities. The retail real estate landscape of tomorrow, in Southeast Michigan and around the country, might be slightly less extensive, but it is also going to be a more diverse and positioned for long-term success.

Ron Goldstone serves as executive vice president for Southfield, Michigan-based Farbman Group, a  full-service real estate firm handling all facets of real estate transactions for companies throughout the Midwest.