The big box is back, baby — big time. Generally savaged as “dinosaurs” after a succession of large-format national retailers went belly-up in the recession, these buildings are now not just off the critical list, they are actually thriving again, with rapidly improving fundamentals and new occupancies by frequently unconventional tenants.
“The stock of vacant boxes has come back to prerecession levels, and vacancy rates are now pretty consistent with overall vacancies,” said Todd Caruso, the senior managing director who heads CBRE’s retail owner/agency practice in the Americas. “We no longer have this massive disparity; the segment is growing with the strengthening economy, and new concepts are emerging and even breeding other concepts.”
Expanding retailers are filling many boxes, and other sites are leasing out to nonretail uses: medical offices, day-care centers and various types of entertainment concepts, such as trampoline centers, and even interior skydiving facilities that use wind tunnels to simulate the experience. Some box spaces are split between retail and office tenants, such as in Royal Oak, Mich. where a former two-story Barnes & Noble downtown was divided into a second-floor headquarters for software firm Vectorform and a ground-floor space for Buffalo Wild Wings. Another two-story Barnes & Noble, at Sundance Square, in downtown Fort Worth, Texas, was partially filled by a ground-floor Cheesecake Factory that opened in December.
In New Jersey nearly all the quality vacant box spaces have become reoccupied, says Chuck Lanyard, president of the Paramus, N.J.–based Goldstein Group. “It’s a big difference from just a year and a half ago,” he said. Such retailers as HomeGoods, Marshalls and T.J.Maxx and exercise chains like Crunch and LA Fitness are filling many midsize boxes, while the likes of Floor & Decor, Hobby Lobby, Price Rite,
Wegmans and Whole Foods are filling larger ones, Lanyard says. “We’re also seeing myriad entertainment uses, like gymnastics and indoor swimming and trampoline centers, but not as many churches,” Caruso said. “That surge was three to five years ago.”
Landlords and investors who once balked at leasing to medical users are now welcoming them, Caruso says. “They don’t see them as a detriment,” he said. “The outpatient medical business is a $10 billion industry, and we’re only scratching the surface.” Urgent care, orthodontics, satellite hospitals and MRI and oncology centers are expanding aggressively into midsize big boxes. “Those are great credit groups, and that makes them attractive to landlords, who can put together 5- or 10-year deals and limit downside risks.”
Economic indicators continue to show promise for the sector, says Raymond Cirz, chairman and senior managing director of New York City–based Integra Realty Resources, which performs real estate valuations. One well-located northern New Jersey power center that lost its anchors — namely, Borders, Linens ‘n Things and Old Navy — sat vacant for years until last fall, when DSW Designer Shoe Warehouse, Nordstrom Rack and T.J.Maxx signed on in quick succession, Cirz says. Big-box rents, which were at about $22 per square foot in parts of New Jersey before the recession, have recovered to the upper teens, he says. Conversely, power center cap rates, which have declined from nearly 7.4 percent in 2009 to about 6 percent now, offset those lower rents for owners, he says.
One of the best illustrations of the sector’s improved vitals is the Phoenix market. One of the three hardest-hit regions in the recession, the Phoenix area suffered 12 consecutive quarters of both negative absorption and rising vacancy rates, with such big-box sellers as Circuit City, Linens ‘n Things and Mervyns all cratering, observes Dave Cheatham, managing principal of Phoenix-based Velocity Retail Group: “At one point there were 250 available boxes.” The number continues to fall, from 168 in mid-2011 to 113 in mid-2014, with fewer than 100 being projected for this year, according to CBRE. Many buildings have been taken over by some of the aforementioned unconventional users, which have discovered how much cheaper it is to retrofit an existing space than it is to build a new one, Cheatham says.
Numerous boxes in Arizona have been reborn as schools, including a former Albertsons in Gilbert, which was split into two floors housing the Leading Edge Academy charter school, and an old Smitty’s supermarket in Chandler that has become the 700-student Chandler Preparatory Academy. This school, which says it bought and renovated the property for about $100 per square foot — half what it might cost to build from scratch — also dug up the parking lot to create athletic fields. Additionally, a former Smith’s Food & Drug site in Mesa now serves as Guerrero Elementary School, while an old Osco drugstore in Chandler has become the East Valley Jewish Community Center’s school.
Some boxes are becoming showrooms. In Glendale, Ariz., an old Lucky supermarket has been taken over by Stardust Building Supplies, a nonprofit that promotes the reuse of building materials and housewares. And the sparsely occupied, 173,000-square-foot Peoria (Ariz.) Town Center, once home to Walmart and Albertsons, became the property of State Trailer Supply, a distributor of recreational-vehicle accessories. Stardust will use 60,000 square feet of the facility as a superstore-showroom and has plans to lease out the rest. In Mesa, Banner Health bought a former Bashas’ grocery store and surrounding buildings to develop a medical mall for offices, labs and surgical and neurology centers. Coming soon to yet another former Bashas’ grocery site, this one in Gilbert, is an entertainment center called Fat Cats.
While developers elsewhere have achieved better yields per square foot by tearing down old boxes and replacing them with multifamily buildings instead of retail, there is too much available land in Phoenix to make that formula work, Cheatham says. For cities the downside of converting boxes to nonretail is the loss of local tax revenue; Leading Edge Academy’s reuse of that old Gilbert supermarket, for instance, reduced property-tax payments there from $160,000 annually to nothing, according to Maricopa County officials.
Most of the former Borders spaces that came available after the chain’s 2011 bankruptcy were snapped up quickly, because they happened to be class-A real estate, says CBRE’s Caruso. Some were taken by nonretail users like Hope of the City Church, which now occupies the former Borders at Westfield Southcenter Mall, near Seattle, but most remain in retail use.
Among the latest refilled former Borders is a two-story space in Wynnewood Shopping Center, near Philadelphia; the space was taken over by a DSW and a Mad Mex restaurant in mid-2014. Mad Mex, a regional chain, took 7,700 square feet on the first floor, while DSW took over 20,000 square feet, mostly on the second floor. A Borders space at the Watters Creek mall, in Allen, Texas, was leased by Michaels, which opened its store there in October.
Less fortunate may be the owners of boxes in ‘C’ and ‘D’ locations; these typically remain empty owing largely to market shifts, according to Mez Birdie, director of retail investment at Florida-based NAI Realvest. Some of those hard-to-lease big boxes are finding new life as climate-controlled self-storage properties, he says.
Though some ‘B’ boxes are leasing out to retailers as the market improves, nonretail tenants occupy the -majority, Birdie says. “These add value to a property as long they don’t adversely impact parking and the visibility of traditional retail tenants.”
Some choice box locations sit empty simply because their leaseholders want it that way. “The philosophy of most retailers is to avoid assisting competitors directly or indirectly,” Birdie said. “Thus, boxes of all sizes continue to remain vacant — with rent being paid on them.” Some will stay vacant until the lease expires, a scenario that can create a negative chain reaction for landlords, Birdie says. Insurance on vacant properties tends to be double or triple the rate of occupied property, and some empties cannot be insured at all, he says. “Vandalism and property maintenance is also a huge challenge,” Birdie said. Other owners are repurposing big boxes by writing off some or all of their depth and accommodating multiple smaller retailers, says Kenneth Katz, a partner of Houston-based commercial real estate firm Baker Katz.
Cities and counties are pushing the re-leasing of big boxes by attending ICSC’s RECon, in Las Vegas, and other meetings. “It used to be that cities would attend ICSC events to promote and market new developments only, but in recent years they’ve been actively promoting redevelopments,” Birdie said. “They recognize the opportunities to improve economic conditions and their tax base.”
Some big boxes that have sat vacant for upwards of a decade are finding new life. In Gainesville, Fla., Lucky’s -Market, an organic-foods grocery, took over the Pick ‘n Save space that had been empty for 18 years. Burlington Coat Factory took 67,000 square feet of a persistently vacant Walmart on 13th Street, while Big Lots moved into part of another long-vacant building in town, a former Albertsons. Furniture chain Rooms To Go leased a former Sticks ‘N’ Stuff building on 13th Street, which had sat unoccupied since 2011, except for a few temporary tenants.
Last year Total Wine & More opened a shop in a 32,000-square-foot former Ultimate Electronics store just off Interstate 20, near the Parks at Arlington (Texas) mall; the store site has not had a permanent tenant since 2005. Meanwhile, Flight Deck, an indoor trampoline park, opened a site inside a former CompUSA building on I-20. Baker Katz renovated the facade of a 90,000-square-foot metal building in Port Arthur, Texas, leasing the space as three junior boxes: to Hobby Lobby, Party City and PetSmart.
In Waukesha, Wis., Lockard Development bought a 115,000-square-foot, vacant Kmart store and will be spending some $14 million on renovations — extending it by about 10,000 square feet to accommodate Dollar Tree, Xperience Fitness and other tenants, with completion slated for late this year. In the Chicago area, Whole Foods is converting four Dominick’s groceries — in Edgewater, Lincoln Park, Streeterville and the West Loop — into Whole Foods units. Meanwhile, locally based Cermak Fresh Market took over two Chicago-area Dominick’s spaces in its own right.
Industry data portend further big-box absorption. An estimated net retail absorption of nearly 85 million square feet last year marks an 87 percent increase over 2013, according to Marcus & Millichap. Strengthening fundamentals reduced the U.S. vacancy rate by an estimated 70 basis points to 6.5 percent, resulting in 2.5 percent rent growth, the firm says. About 51 million square feet of new retail space came online last year, mostly in grocery store space, Marcus & Millichap says. But those numbers do not include any midsize retail big boxes that are showing up on the ground floors of mixed-use developments, says Caruso, who predicts little if any speculative big-box construction in the offing. Still, big-box leasing has been so brisk, he says, that CBRE has stopped publishing its annual big-box vacancy reports on all but a few U.S. markets. Said Caruso: “That tells you where the segment is right now.”
