Vacant Big Box Retail Stores
The current economic downturn and the contraction of the retail sector have resulted in an increasing number of vacant “big box” retail stores in shopping centers across the country. A “big box” is a freestanding building occupied by a single retail tenant that contains between 20,000 to 200,000 square feet of space and is surrounded by a large parking area. Big box structures are designed to house large inventories in an efficient and cost-effective manner. They are constructed to the meet the specific needs of the big box tenant. Examples of big box retailers include Wal-Mart, Target, Costco, and Home Depot.
As the number of vacant big boxes increases, owners, developers, and communities are faced with the challenge of what to do with them. Big boxes have been redeveloped into libraries, community centers, charter schools, churches, museums, and civic centers. While this redevelopment is promising, churches, schools, and other public uses generally are exempt from real estate taxes and they do not generate sales taxes. Ideally, the new use of the big box space will generate sales and property taxes as the big box retailer did, but oftentimes, this is not the case. The failure of a re-use tenant to generate sales and property taxes further contributes to the already daunting fiscal challenges faced by many local communities. Lower rent tenants, such as discount retailers and grocers, are also options for reuse of vacant big box space but owners may be concerned that lower rent tenants may devalue the property.
Redeveloping vacant big boxes present special challenges to communities, owners, and prospective tenants. Leases or deed covenants may contain restrictions that may impact the ability to re-lease the property. Zoning and land use issues may impede or constrain the future use of the space. Co-tenancy clauses in leases of other tenants in a center may result in tenants abandoning a center if a big box tenant vacates its space thereby triggering a landlord default under the lease.
While creative ideas for the reuse of vacant big box spaces exist, it will take the support of local governments and communities as well as available financing to make the redevelopment of these big boxes work.
Almost all new build shopping centers are mixed use - they include some combination of office and residential in addition to the retail space. Elizabeth Hamilton, in house Real Estate Counsel at Office Depot, recently reminded me of the special problem this presents in allocating CAM, taxes and insurance. Some portion of each must be allocated to the office and residential components, but should it be on a strict per square foot basis for all users? Taxes and insurance should be allocated among all users equally on a per square foot basis. This means the dominator of the fraction defining a tenant's pro rata share should include all retail, office and residential space. (Of course, creating separate parcels eliminates or reduces the problem.)
“Mixed-use” developments, which incorporate residential units with retail or other commercial uses, have steadily gained in popularity over recent years. This is due to the fact that mixed-use developments offer advantages to developers, owners, tenants and residents when compared to traditional single-purpose developments. Many of today’s home buyers are increasingly interested in living within walking distance of amenities such as restaurants, movie theaters and shopping. From the developer’s perspective, mixed-use projects provide diversification in the product they have to offer. Commercial owners and tenants benefit from having a built-in customer base and consistent traffic through their stores due to their proximity to the residential units.