Vacant retail space is the latest focus of some industrial developers who are trying their hand at converting retail to warehouse or last mile facilities. The general public seems to think this is a sure thing with many people assuming all vacant retail space will eventually be warehouse or industrial space. However, converting retail space to industrial is extremely complicated.
There are few case studies on the topic. Conversion rates for this kind of transformation are still very low despite the sub-5 percent vacancy rates the industrial market has seen over the past 12-18 months. The instances of retail-to-warehouse conversions are a mere sliver in the overall amount of new industrial deliveries.
Since 2016, there has been 893.3 MSF of new industrial supply, of which 840.2 MSF was logistics, according to Cushman & Wakefield Research. In terms of this recently delivered industrial supply, retail-to-warehouse conversions account for 1.2 percent of total industrial deliveries and 1.3 percent of new logistics supply.
When we look at the bigger picture however, what’s significant is retail-to-warehouse conversions make up less than one-tenth of one percent (0.073%) of the total industrial inventory and just one-tenth of one percent (0.107%) of existing logistics inventory.
Our Cushman & Wakefield industrial experts further examined this phenomenon, and here we review the challenges faced by developers seeking to convert a retail asset to industrial. The main challenges of conversion fall into three categories: community acceptance, location, and building design.
Empty retail facilities equal lost jobs and tax income for a community, so it may seem intuitive to think residents would want these vacant buildings filled. But many people associate warehouses and industrial buildings with noise, pollution, congestion, and eyesores, and these attitudes can be detrimental to retail-to-warehouse conversions.
Community concerns include:
- Proximity to residential neighborhoods and schools
- Traffic congestion
- Noise pollution
- Environmental pollution
- 24-hour operations
There are, however, strategies to mitigate these impacts. Limiting the hours of operation, screening truck court lighting, and banning air braking and engine idling within a specified area around a community can be all it takes to quell community worry, especially when the property was previously a retail center. Electric vehicles can also make a difference because they reduce noise and emissions.
In addition, educating community residents about the reality of these facilities can be a critical tactic. When neighbors are informed about the safety precautions developers adhere to, the environmental considerations enforced, and the economic impact these facilities create locally in both jobs and tax revenue, community concerns are eased and can result in one less barrier to conversion.
As with most real estate, the location of a potential retail-to-warehouse conversion can make or break the development.
Questions to consider include:
- Demand – Is there a need for an industrial warehouse, distribution center, or last mile delivery facility in the area?
- Zoning – Can zoning be changed from retail to industrial?
- Neighborhood restrictions – Will existing neighborhood Covenants, Conditions & Restrictions (CC&Rs), including go-dark prohibitions or surviving retail neighbors, cause hurdles to conversion?
- Proximity to arterial and interstate access points – Can vehicles and products be moved efficiently to and from the center?
- Population – Is the location near a densely populated urban area that is effective for a last mile delivery facility?
While it sounds simple, renovating a retail building to work for an industrial user is not a small task. There are numerous obstacles to overcome, both inside and outside of the four walls.
Elements to consider include:
- Adequate dock doors and/or truck bays
- Floor loads not capable of supporting machinery and racking, leading to concrete disintegration and costly repairs
- Floors that aren’t level and flat enough for equipment and racking systems to function properly
- Floor joints that can cause rocking and spalling
- Column spacing that is usually too tight for efficient racking
- Ceiling heights that limit vertical stacking
- Sprinklers that often need to be raised
- Odd buildings layouts that don’t efficiently maximize space
- Utilities or power to adequately facilitate automation
- Maneuvering room for trucks to turn around or circle a building
The Silver Lining
Challenges in the design of a retail building doesn’t mean there aren’t any benefits. Retail typically is equipped with large parking lots, which afford room for truck parking, truck maneuvering, and possibly even room to expand. It is also likely that traffic patterns surrounding a retail center are already engineered to limit congestion and are typically accessible to population density, interstates, and advantageous distribution corridors.
Big Box retailers can also be an easier sell. It is likely retail-to-warehouse conversions for Big Box retail centers could be easier than converting a mall. Big Box retail is typically square or rectangular, often has taller ceilings, and may not receive as much resistance from a community. It can be easier for the public to digest the conversion of a home improvement store into a warehouse versus the conversion of a high-end fashion boutique. Malls are typically more challenging to utilize because they are irregularly shaped and span multiple floors.
Is This Really Happening?
Although it isn’t widespread, retail-to-warehouse conversion is happening. But it isn’t necessarily a game changer for industrial. While provocative, this trend will likely only grow once developers are able to generate a successful conversion formula that balances the cost of community acceptance, location, and the design requirements of these unique transformations.
As Logistics & Industrial Lead, Americas, Tray Anderson provides strategic vision and leadership for the firm’s 840+ industrial brokerage professionals and eight industrial advisory groups in the United States, Canada, Mexico, and South America. He also oversees the Industrial service line’s collaboration with Cushman & Wakefield’s other service lines, such as Global Occupier Services (GOS), Global Consulting, and Capital Markets.