Covid has accelerated drastic changes in consumer behavior, and nowhere is this more visible than on America’s retail landscape, where more than 10,000 brick-and-mortar stores are expected to close their doors in 2021.

Rather than driving to their local mall, many consumers are doing their shopping online. Global real estate and investment management firm JLL has projected that e-commerce sales could reach $1.5 trillion by 2025. This would increase demand for industrial real estate by an additional 1B SF, JLL estimated.

To service all of those online sales, retailers are exploring converting unused retail spaces to new uses such as distribution hubs.

“Vacant retail space is often geographically desirable for this use,” JLL Senior Managing Director Seth Geldzahler said. “Many retailers are trying to keep down the cost of the expensive last mile by increasing the number of delivery hubs and reducing transportation distances. Additionally, increased online demand means companies need increased inventory, which is pushing them to expand their warehouse footprints.”

David J. Rabinowitz, a director at law firm Goulston & Storrs who has widespread experience serving the retail industry, noted that many surviving retailers are looking to downsize their excess space, which also contributes to the trend.

“This means landlords are left to either subdivide their existing space or relocate these retailers to a new, smaller space within the center, which will leave their prior space vacant,” he said. “There are also fewer retailers to gobble up vacant space.”

Bisnow spoke with Geldzahler and Rabinowitz about the opportunities and challenges of converting retail space to industrial use.

Bisnow: What are the most desirable industrial uses for retail conversions?  

Geldzahler: Ease of access, proximity to customers and parking for delivery vehicles make last-mile delivery the low-hanging fruit for reuse of vacant retail. Some retailers convert vacant stores to distribution for their own use, but we are also seeing delivery companies and third-party logistics providers using vacant stores. More complex conversions of vacant shopping centers can also accommodate light manufacturing and packaging.

Bisnow: What are key issues that a retail property owner needs to understand about conversion?  

Geldzahler: Traditional large shopping centers often have several landowners involved, including the key developer, anchor stores and outparcel owners. They are governed by restrictive easement agreements — REAs — that may prohibit or greatly restrict nonretail use in the shopping center.

The remaining retailers are paying rent or have chosen to locate their store in a shopping center to attract as many customers as possible. They usually don’t want their customers to be dissuaded from shopping in the center because of concerns about "too many trucks" and/or not enough retail co-tenancy. This means hybrid models — where retail operates alongside industrial use — are very tricky to execute.

Bisnow: Where do third-party consent rights fit into this?

Rabinowitz: As Seth noted, parties to the REA and other anchor leases will have approval rights on major changes to the retail project. This would include materially changing the footprint of the existing project and permitting uses that were likely prohibited, like industrial and warehouse uses.

Landlords, as borrowers, would also be prohibited from making major changes to the property, including the type of tenants, without the lender’s consent. This is because the lender underwrote a certain type of project — in this case, retail — in the original loan that it felt would be viable in case the landlord, as borrower, defaulted on its loan and the lender was put in a position to take over the project.

Bisnow: What zoning issues are likely to come up in a proposed conversion? 

Geldzahler: Issues include challenges if the property is not zoned for industrial use, or concerns with significant truck traffic and a high concentration of car/van traffic at shift changes because local roads and traffic patterns were not designed to handle that. Also, the general hours of operation — most industrial uses want or need 24/7 operation. Retail is often restricted to limited operating hours, sometimes even through noise ordinances.

Rabinowitz: Language is important. In talking with the local municipalities, you might consider not using the words "industrial" and "warehouse." Instead, consider using less offensive terms, such as a "logistics center."

In addition, if you can include some sort of consumer-facing aspect within this new use, it might help assuage some of the municipality’s concerns.

Bisnow: What are your industrial clients’ priorities for new space?

Geldzahler: Right now, very hot issues are on-site parking for last-mile delivery vehicles and the ability to charge electric vehicles. In addition to the other issues such as 24/7 easy access, immediacy of availability is quite important. Complicated conversions may be feasible, but current demand is at an all-time high, and ease of entry is a major concern for any logistics operation.

This article was produced in collaboration between Studio B and Goulston & Storrs. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.