Research reveals growing demand to transform retail real estate

The conditions are ripe for retail-to-industrial real estate conversions, especially as distressed malls look for ways to uncover new value, according to a report from commercial real estate services firm Newmark, released earlier this month.

The report, Retail-to-Industrial Transformation: As the Retail Landscape Changes, Can Outdated Mall Anchors be Reborn as Fulfillment Centers?, examines the rise of e-commerce and accompanying demand for warehouse and fulfillment center space with the decline of traditional malls across the country. The researchers point to the changing role of traditional mall retail space that was accelerated during the pandemic, highlighting both the opportunities and challenges facing retailers and property owners.

“The challenges in the U.S. retail market were exacerbated by the pandemic in 2020, resulting in further softening of fundamentals throughout the country, prompting mall owners to more aggressively consider alternative uses for their assets,” according to a Newmark spokesperson. “Tight industrial market conditions are accelerating these discussions, particularly as ‘buy online, pick up in store’ (BOPIS) programs increase retailers’ need for warehouse space.”

The researchers highlighted three primary factors that are driving retail-to-industrial conversion potential:

Regional malls have experienced an evolution over the past 50 years, as the once-celebrated destinations face increasing competition for shoppers and their discretionary spending, they wrote. Consumer demand for more open-air shopping areas has led to a decrease in the number of new malls constructed and many retailers leaving enclosed malls for these newer centers.

Department stores have been “anchors” wherever they were located, whether it was a downtown city block or a suburban regional mall. The dwindling number of these stores creates new challenges when space is vacated and owners look to find new tenants, they said. The challenges in the U.S. retail market were exacerbated by the pandemic in 2020.

Converting vacant anchor spaces at shopping malls into distribution or fulfillment centers in service of e-commerce offers considerable upside as a redevelopment play. In some cases, a full property conversion may be the highest and best use of the property, although the conversion process can be expensive and complex.

The researchers admit that, to date, mall-to-fulfillment center conversions have been limited, but they point to some recent regional projects that may bear fruit. Examples include:

Department store Macy’s said last fall that two stores it had closed earlier in the year would be repurposed as fulfillment centers. The retailer also emphasized recent efforts to promote BOPIS and curbside delivery, including the conversion of stores in Dover, Delaware, and the Denver suburbs into omnichannel service centers.

Walmart is testing the conversion of part of its stores into fulfillment centers, with plans to use the front half of some buildings for typical shopping while the back half would be converted into warehouse and fulfillment center use.

At the end of 2020, the Worcester, Massachusetts, Planning Board approved the proposed redevelopment of Greendale Mall into a last-mile distribution and fulfillment center for Amazon. This would be the first such conversion in New England, according to the report, which also said the mall owner had planned to convert the space to mixed-use development but changed course due to the accelerated rise of e-commerce during the pandemic.

“Not every obsolete mall site will work as a fulfillment center but repurposing these sites—and sometimes existing buildings—to their highest and best use can be a win for the asset owners and the local community as the retail landscape evolves,” the researchers wrote.
Go to Newmark.com for more on the report and other industrial real estate trends.