With DC Space Tight, Mall and Store Conversion Increading Option

Demand in the US for distribution space continues unabated, driven by a healthy economy, ecommerce and increasingly short delivery windows, forcing inventory to be located closer to demand.

For example, last year Home Depot announced plans to build 170 new local fulfillment centers across the US in support of rapid deliveries.

Supply Chain Digest Says... CBRE says such conversions can be difficult, meaning growth will be slow, but it does expect the pace of such changes to accelerate. What do you say? Click here to send us your comments Click here to see reader feedback

Real estate firm JLL late last year estimated that 247 million square feet of industrial space – most of it for distribution – would be delivered to the US market last year, which would be the highest level since 2007 if the final numbers are the same.

In many market, land for new DCs is hard to find and expensive.
At the same time, many retailers and shopping malls have fallen on tough economic times, closing down in whole or part.
Does this provide companies and real estate developers with an opportunity for conversion of retail space to distribution center usage?

There has been talk for several years about retailers using "dark stores" for efulfillment, though it’s not clear how much such conversion has actually happened.

But there are clearly such moves happening, according to a new market flash report from CBRE, which found 24 such examples of properties across the country that were once retail locations but now have been converted or are in the process of being converted into distribution space.

At these 24 locations, 7.9 million square feet of retail space has been converted into 10.9 million square feet of industrial space, the latter figured larger because in many cases the developer will knock down the retail space and replace it with a DC that has a larger footprint.

As SCDigest reported at the time, the Randall Park Mall, the largest mall in the country when it was built in the 1970s, went through a long period of decline before it shuttered its doors a number of years ago. A couple of years ago, the mall was raised and is now a large Amazon fulfillment center.

Not far away, the shuttered Euclid Square Mall east of Cleveland is under construction to become home to another new Amazon FC.

In fact, CBRE found a total six shuttered malls across the US are either in the process of being turned into or have been revamped into manufacturing plants and logistics hubs.

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The report also cited examples of shuttered Walmart, Target, and local grocery store and cinema chains being converted into distribution and industrial uses in a number of metro areas. In Memphis, a Sam's Club store was shut and now is home to a Sam's Club ecommerce distribution center.

However, CBRE says such conversions can be difficult, meaning growth will be slow, but it does expect the pace of such changes to accelerate.

A CBRE executive told CNBC that obstacles include the fact that historically retail assets tend to have greater value than industrial assets, leading to pushback from investors in the property.

CBRE also cites some challenges having a retail property rezoned for an industrial-type use.
Also cited were tax complications: a mall tends to generate property, income and sales taxes for the surrounding community, whereas an industrial building isn't going to bring in sales taxes.

But in a likely permanent transformation of the US retail landscape, will additional retail uses for these empty properties really materialize? Investors and cities might find they have no real alternatives to conversion to DCs.

And with a growing number of empty retail store fronts and malls, often in choice locations near population centers, it seems this mini-trend is likely to gain more momentum.

What do you think of converting malls and stores to DCs? Let us know your thoughts at the Feedback section below.