At a time when medium and large retail box vacancies are spiking, landlords are finding creative new ways to fill prominent gaps

by Alex Tostado

At  a time when the topography of the retail landscape looks very different than it did just a few short years ago, one of the most striking changes is the large number of medium and large boxes now standing empty. Every few months seems to herald the announcement of another major brand consolidating or announcing bankruptcy or significant closures. The shockwaves from the Toys ‘R’ Us shutdown are still reverberating across the industry, further highlighting the need for brokers, owners, investors and landlords to find new and creative ways to fill these empty spaces.

Fill ‘er up

Perhaps the biggest challenge is that there is a relatively limited pool of traditional brands available to fill those larger boxes — particularly at a time when more retailers are embracing smaller and more efficient formats. When an Eastern Mountain Sports vacates a 15,000-square-foot space in Newton, Massachusetts — to use a recent real-world example — the list of potential brands and businesses to backfill that space is not long. While there are some notable success stories out there — with the impressive and expanding constellation of TJX Companies (TJ Maxx, Marshall’s, Home Goods) being one of the prime examples — backfilling bigger boxes these days often requires a certain degree of flexibility and creativity.

A handful of spaces have been filled by “box hopping,” where an expanding brand like Hobby Lobby trades up to move into a larger space or a more favorable location. There are a handful of retail tenants that are surprisingly active in larger spaces. Furniture is one example, with brands like Bob’s Discount Furniture and The Dump Luxe Furniture Outlet — a brand that exclusively targets large-format second-generation spaces — moving into vacant big boxes.

Tradition, schmadition

Arguably, the biggest storyline when it comes to backfilling large vacant boxes is the increase in non-traditional concepts that are taking advantage of these noticeable gaps in the commercial canopy to reach for their own patch of sunlight. This is particularly prevalent in secondary and tertiary markets, and in spaces on the fringes of more valuable commercial real estate. Ironically, at a time when so many national medium and bigger-box brands are consolidating or going out of business, a diverse group of non-traditional options is emerging. Landlords and brokers — partly out of necessity and partly out of recognition that there are a sizable number of unconventional candidates available to fill those spaces — are both literally and figuratively buying in.

The list of non-traditional concepts filing vacant big box spaces includes everything from indoor climbing centers and discount fitness concepts, to self-storage centers. Children’s gyms and recreational facilities are becoming more prominent, and some children’s daycare companies are even considering larger facilities where they can combine recreational space with more traditional learning and childcare environments. New and expanding entertainment concepts like Top Golf and Mario Andretti Speedway (which features an indoor go-kart track and entertainment center) are prime candidates for the right spaces. Discount theaters are another option, as well as mortgage origination firms and other non-traditional office tenants. Co-working and meeting/office space concepts like WeWork and WorkBar are effectively backfilling vacant boxes. Medical uses like clinics, outpatient facilities, hospital satellite campuses and more are popular, and educational facilities are also on the rise as well.

Even the cannabis industry is making moves. Dispensaries with back-office operations are snapping up vacant boxes in Massachusetts, and former Kmarts are being converted into grow-houses in Ohio. Some landlords and developers are demolishing or redeveloping their spaces, abandoning retail entirely and electing to go with residential, hospitality or mixed-use that is designed to complement existent adjacent or surrounding retail. The field has actually become so diverse that some in the industry have stopped referring to backfill candidates as retailers, instead calling them “likely occupiers of first-floor space.”

Potential snags

It’s not all about creativity and opportunity, however. As intriguing as non-traditional big-box backfill candidates may be, the reality is that landlords and brokers will always be somewhat constrained by the quality of the real estate. While discount concepts have established a foothold even in more affluent areas in recent years, market conditions and the age-old real estate truism of location-location-location will still dictate your options to a large extent.

It is also important to note that it’s generally much more difficult to fill spaces left vacant by traditional large department store anchors. Malls almost always have covenants and usage issues that need to be accommodated, and reciprocal easements and operating agreements add a layer of complexity that must be carefully navigated. Balancing what owners want for their properties with what new or subleasing tenants want can be tricky. Sometimes those goals are conflicting, or even mutually exclusive.

Challenges presented by the physical spaces themselves cannot be discounted, either. From ceiling heights to buildout requirements, the large size and specific dimensions of larger boxes can make renovations costly — or even cost-prohibitive. Some large boxes can be divided up into smaller spaces, but the ROI on that also needs to be carefully calculated. Obviously, the return on a vacant box is zero, and breaking up a large space into smaller pieces can sometimes open up the pool of candidates suitable to occupy the space. But depth is a common issue. A 130-foot-deep space can pose problems, and owners and developers are also leery about potentially creating common area space that they are going to lose rent on.

The bottom line, however, is that this active and frankly fascinating commercial real estate sector is only going to continue to become more relevant in the months and years ahead. There are more big-box closures on the way, and the turbulence of a rapidly evolving industry will continue to present plenty of opportunities for backfilling those spaces with new concepts and creativity.

Stephanie Skrbin, John Schupp and Jeffrey Arsenault are principals at Avison Young in the firm’s retail real estate division. They can be reached directly at [email protected], [email protected], [email protected]. This article originally appeared in the April issue of Shopping Center Business.

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