‘The Nature Of The Mall Is Changing’ As Simon, Brookfield Eye Converting Anchors To Industrial – Bisnow

Dead malls have been viewedas attractive targets for industrial conversion projects in recent years, but nowthe retail-to-industrial conversion trend is expanding to shopping centers that are merely wounded, but still alive.

The Metro Mall in Queens, where Amazon leased industrial space formerly occupied by retailers Toys R Us and Kmart.

Mall owners this year are increasingly considering projects that wouldconvert vacant department store space in existing malls into last-mile distribution facilities as demand for industrial space has far outpaced retailduring the coronavirus pandemic.

Simon Property Group is in talks with Amazon to turn some of itsvacant department store spaces formerly occupied by JCPenneyand Sears into e-commerce distribution centers, the Wall Street Journal reported Sunday. Simon CEO David Simon, speaking on the REIT's earnings call Monday, said he could notrespond to "market rumors," but he did speak to the larger trend.

"Generally, the important thing going on that we're seeing is that moreand more retailers are distributing their e-commerce orders from their stores, so they're fulfilling from their stores and there are also the curbside pickup and all sorts of fulfillment options available," Simon said. "That's a good trend long term for us, but beyond that I don't want to get into logistics or any kind of speculation around Penney or Amazon."

Brookfield Properties, another major U.S. mall owner,isbeginning to experimentwithusing space at its active shopping centers for industrialdistribution space. The CEO of Brookfield'sretail group, Jared Chupaila, discussedthe strategy on the firm's earnings call last week.

"We have begun to test and trial with retail tech companies that are providing solutionsforlast-mile delivery and other fulfillment solutions where we can use otherwise unused space at the back end of shopping centers to help consolidate the packages and provide greater convenience to the couriers, all of which is expediting the delivery of the product and the volume of the product that couldbe delivered to the end customer," Chupaila said on the call, according to a Seeking Alpha transcript.

Amazon has already shown a willingness this year to lease space formerly occupied by retailers for its distribution facilities. In February, it signed a 10-year deal for 300K SF at the Rentar Plaza mall, also known as the Metro Mall, in Queens,Commercial Observer reported.

About 190K SF of the space Amazonwill take at the Queens property was formerly occupied by Kmart and Toys R Us. The property continues to operate as a mixed-use asset with existing retailers such as BJ's Wholesale Club, Jennifer Furniture and Burger King.

The REIT analyst who asked Simon about the Amazon deal, Mizuho Americas Managing Director Haendel St. Juste, toldBisnowthe conversion projects make more sense now because of the damage the coronavirus has wroughtin the retail market.

"Post-COVID, we now have a scenario where we have bankruptcies and store closures on top of what we've already seen the past couple years," he said. "Right now, the prospect of filling up a bunch of empty anchor boxes, who is the next user of that space? It's not like you've got a line of people queued up to take that space. You can read the tea leaves. The times are changing. The nature of the mall itself is changing."

A map from CBRE showing the retail-to-industrial conversion projects that have moved forward across the U.S. since 2017.

A CBRE report released last monthfound 59 retail-to-industrialconversion projects that have been completed, begun construction or been proposed since 2017.That is up significantly from January 2019, when there were24 such projects.

Many of the conversion projects CBRE found are full-scale redevelopments of completely vacantmalls, but CBRE Associate Director of Industrial and Logistics Research Matthew Walaszek said he is increasingly seeing owners look to convert vacant space in malls that continue to operate.

"That's something we have seen and we would point to as the next phase for the blending of retail and industrial," Walaszek said of the conversion projects in existing malls. "We will absolutely see more and more of that."

The conversionstrategyhad begun prior to the pandemic, asthe industrial market has performed much better than retail in recent years, but thecoronavirus has accelerated the trend as more people shift their shopping behaviors to online deliveries, Walaszek said.

"COVID has accelerated a lot of the trends that have been happening already," Walaszek said. "We're looking at new forecasts where e-commerce as a proportion of overall retail is higher than what we had previously anticipated."

Walaszek said CBRE has one retail landlord client, which he declined to name, that is looking for opportunities across 15 different markets to convert retail spacesto industrial. In addition to mall owners converting vacant big-boxspace, Walaszek said he is also seeing a growing trend ofdepartment store tenants shrinking their retail footprint to set aside space for delivery facilities.

"We're going to start seeing more concrete examples of retailers repositioning their footprint and incorporating logistics, especially as e-commerce grows and there's going to be a need for returns," Walaszek said.

Transwestern Senior Managing Director Mark Glagola, a D.C.-area industrial broker,said he has heard a great dealof talkin the market about the conversion projects and sees it as an emerging trend, but he has yet to see completed examples of projects that mix industrial and retail space.

"The industry appears to be really kicking this tire hard, and I do think things will happen, they just haven't happened yet," Glagola said. "We haven't figured out the logistics of how the fulfillment centers fit into a retail environment, and does it remain a retail environment? I do think they will happen, but they're still sizing each other out."

Glagola said he sees several potential logistical issues withusing vacant department stores in existing malls as industrial space, such as malls not having enough loading docks and the industrial and retail traffic mixing in the parking lot.

"The issues include the physical logistics and the potential mix of retail and industrial tenants from an asset management perspective," Glagola said. "Some facilities may be able to do it because they may be able to segregate the uses, others won't because they can't. Not every retail property is the same."

In addition to thelogistical concerns, St. Juste said there are also potential issues involved with the lease agreementsmall owners have with inline tenants, some of which depend on having a retail anchor.

"What does the mall look like if you don't have two or three anchors? And then there are co-tenancy risks that come into play," St. Juste said. "Inline tenants that have struggled and are looking to reduce square footage and get lower rents now could potentially get a get-out-of-jail-free card at some malls with potential co-tenancy clauses."

While there could be challenges withconverting department stores to industrial, St. Juste said mall owners don't have many better options.

"Priority No. 1 right now is, 'Let's figure out what we can do with all this excess space in a market where clearly retail is at risk and we need to think of a better path,'" he said. "It's just one more thing to try to make the best use of their space and stay ahead of the curve a bit."

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'The Nature Of The Mall Is Changing' As Simon, Brookfield Eye Converting Anchors To Industrial - Bisnow