Big-Box Retail May Find New Life, But Not In Rural America

In the case of big-box retail, not all liquidation is created equal.

Reports of Amazon’s desire to purchase some Toys R Us stores to expand its retail footprint may be good news for retail landlords looking to fill vacant space, but some experts say empty boxes in tertiary or rural locations could have a harder time finding life after liquidation. 

“We looked at Toys R Us, and 35% of the stores that are closing have very strong demographics, and landlords should be OK re-tenanting that space or converting [it for] different uses,” CoStar Director of Research Suzanne Mulvee said. “Thirty percent of stores I wonder if they’ll be able to find a tenant or backfill. What’s in the middle is a gray area.”

There was 100M SF of liquidated retail space in 2017, Mulvee said. There has already been 76M SF of retail closing announcements in 2018, and the first quarter has yet to conclude. While many argue retail is not dying so much as right-sizing, some say retail-to-industrial conversions could be a solution to the excess space, but only in the right circumstances.

“Overall, in the more rural context, you’re going to see these high 18- to 20-foot clear heights in big-box spaces that can easily repurpose as distribution,” Boston-based McCall & Almy Senior Vice President and 2018 Massachusetts Commercial Brokers Association President John Dolan said.

Converting vast big-box spaces into distribution centers is one next-life opportunity given the need for more last-mile options for companies like Amazon, and rural areas might make the most sense given rent and zoning discrepancies closer to the urban core.

Even then, it might have to include more than individual shuttered Kmart, Sears or Toys R Us stores to warrant a costly conversion.

“I don’t think for an industrial developer like us it makes sense to try to pick off the stand-alone Toys R Us box,” Boston-based The Seyon Group Managing Partner Andrew Iglowski said. “It’s not big enough, given the heavy lift required on a rezoning effort and how we would have to spend money to make industrial space out of retail. What I see more likely from an industrial space is Class-B or C malls [going] in with some scale to transform it into an industrial park.”

Reuse Requires More People

Even with bigger retail conversion ambition, Iglowski reiterates zoning changes do not come easy, and a failed retail center often signals a greater demographic issue in the surrounding area. If the demographic issue is true, that could spell trouble for even industrial uses like last-mile distribution.

Rents in areas zoned for retail will also make these conversions difficult to tackle, both in rural areas and in lower-performing shopping centers close to city centers. 

“We look at this opportunistically as it comes up,” Iglowski said. “Retail rents are probably still too high to make sense of that real estate as a viable industrial conversion.”

As for big-box rural retail specifically, its days might be numbered. Most rural locations for big-box department stores like Sears were the first to close, according to JLL Americas Retail CEO Greg Maloney.

Specialty stores like Ace Hardware and deep discounters like Dollar General have been on the rise in place of the former large-scale retailers, with the notable exception of Walmart. Dollar General has become rural America’s retail darling, as it opens thousands of stores across the country. The retailer has 14,000 stores across the U.S. and has plans to build 900 more in 2018.

Life After Big-Box Liquidation

A rural town’s odds of finding a new purpose for a shuttered big-box store are not entirely grim. Towns across America have turned these spaces into everything from the country’s largest single-story library to schools and churches. Hormel Foods, the largest employer in Austin, Minnesota, stepped up to turn an abandoned Kmart into The Spam Museum. But it will take more time to find a new tenant for these closed stores in smaller markets.

“The free-standing Sears stores that are still out there will be the hardest ones to fill, no doubt about it,” Maloney said. “It doesn’t necessarily have to be converted to retail. This is usable space for the consumer that can be repurposed into restaurant or entertainment uses.”

For a shuttered big-box store to work for these new uses, there must be appealing demographics to warrant the capital investment for the conversion. Those are found closer to the city and not in rural areas.

“Most retailers look for people first and what they make second,” Mulvee said. “If there are no people, those folks are going to do what they had to do pre-Sears, which was mail-order or, today specifically, shop online.”