Industry Pulse: Opportunities are increasing for retail repurposing

Almost 3,600 retail stores are slated to close this year, including hundreds of big boxes and department stores

Sears Holdings Corp. is the most vulnerable public retail company, according to a recent analysis by S&P Global Market Intelligence. (Photo by Andriy Blokhin, Shutterstock)

In the aftermath of the Great Recession, it became a common strategy for healthcare providers and healthcare real estate (HRE) firms to repurpose the buildings of failed big box and department stores. The bankruptcies of Circuit City, Linens & Things, Blockbuster, Borders and other retail chains dumped hundreds of large (50,000 to 200,000 square foot) spaces on the market — just as providers were warming to the idea of the retailization of healthcare.

Providers, as well as HRE developers and investors, were attracted by combination of relatively low lease rates and/or sale prices (because many retail landlords and building owners were rather desperate at the time) and the strategic opportunity to quickly and cost-effectively locate large multispecialty outpatient centers in convenient off-campus locations closer to where patients live, work and shop.
But the window of opportunity for retail repurposing was relatively brief as most of the more desirable big box and department store locations were snapped within a year or two of the recession. There have been a few exceptions, like the former Syms department store in Cherry Hill, N.J., that was repurposed and reopened in October 2016 as a 150,000 square foot Penn Medicine outpatient center, and which was recently acquired by LaSalle Investment Management for $81.8 million. (For more on that project, please click here.) But aside from that project, we at HREI haven’t heard much about repurposing lately.
But we might be in for another wave of empty big box stores — and an increase in repurposing opportunities. It’s only April, but 14 retail chains have already declared bankruptcy this year, compared to 18 during all of last year. And 10 more are at high risk of defaulting this year, according to a recent analysis by S&P Global Market Intelligence. The chain at the greatest risk of defaulting is one of the biggest: Sears.
Yet recent U.S. economic data shows that disposable income and consumer spending are on the rise. So why the “retail collapse,” as S&P Global Market Intelligence calls it?
“The convenience of online shopping, and the downward pressure it has put on pricing, has radically altered consumer behavior,” the firm explains. Perhaps even more worrying for bricks-and-mortar retailers, the desirable consumer demographic of Millennials (born from 1980 to 2000 or so) has grown up shopping online and has less interest in going to malls. So experts say the trend isn’t likely to reverse itself anytime soon. For more from S&P Global Market Intelligence, please click here.
This is obviously bad news not only for bricks-and-mortar retailers. It also increases the risk profile for real estate investment trusts (REITs) and investors and developers with retail real estate exposure. Of course, their loss could be the HRE sector’s gain, as it was after the most recent recession, as affordable spaces open up in desirable retail locations.
Almost 3,600 retail stores are slated to close this year, according to a recent article in Forbes magazine. A lot of these are leased spaces in malls that are smaller and probably less desirable for healthcare providers, including 1,000 Payless shoe stores and 552 Radio Shacks. But many of the stores on the chopping blocks would provide the larger spaces most providers prefer. Retailers that already closed or who plan to close stores this year include J.C. Penney (closing 138 stores), Kmart (108), Macy’s (63) and Sears (42), as well as specialty chains like The Limited (250), Family Christian (240), Wet Seal (171) and Crocs (160). Even the much-admired Whole Foods has closed some under-performing locations. So this could be an opportune time to start scoping out that next retail repurposing opportunity.

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