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CHICAGO, IL—Retail real estate left behind by the retail industry's evolution can find new life as warehouses and e-commerce distribution centers, and more than 800,000 square feet of space in Chicago have the potential for conversion, according to a new report from CBRE detailing 24 such conversion projects across the US. Midwestern locations in Detroit and Ohio also figured prominently in CBRE's research.

CBRE found various types of retail-to-warehouse conversions, including demolition of obsolete malls to be rebuilt as warehouses in Baltimore, Atlanta, Chicago, Detroit and several markets in Ohio.

Other retail structures were left standing and repurposed for industrial uses, including a former Toys 'R' Us in Milwaukee now occupied by a business that remanufactures transmissions, and Sam's Club's conversions of several of its stores to distribution centers.

In the Chicago area specifically, two retail projects have been targeted for conversion to industrial space. A 150,000-square-foot Sam's Club in Matteson has been converted to an ecommerce fulfillment center for the retailer and a 278,000-square-foot outlet center in Huntley was demolished in 2016 to make way for a proposed 667,000-square-foot distribution center.

“In nearly every market in the U.S., there are sites where this kind of repurposing could work, at least on paper,” says David Egan, CBRE's global head of industrial and logistics research. “But many conversions are more challenging to execute than it might seem, given that the developer-owner of each site often needs to get a wide group of stakeholders to agree on a fairly dramatic change.”

The conversion trend, while growing, remains a niche in the industrial-and-logistics real estate market. Still, it draws momentum from ongoing factors in each industry: Demand for warehouse space is so strong that vacancies are at or near historic lows in many markets. Meanwhile, though the broader retail market is healthy, closures by national big-box retailers and department stores have created opportunities in many cases for nonretail uses to move in.

Factors favoring retail space for conversion include the prime location of many retail centers, which often sit at busy intersections or highway interchanges. Another advantage: Site access. Standalone big-box stores offer backend docks and easy access for trucks. They also have the high ceilings needed for distribution uses.

Finally, some retail spaces simply are available, which isn't always the case for industrial properties in many markets. Most of the conversion projects analyzed by CBRE are in markets with vacancy of less than five percent for industrial-and-logistics real estate.

The primary impediment to conversions is that retail centers are designated for retail uses, by economics and by covenant. Many centers are encumbered by mortgages predicated on retail lease rates rather than traditionally lower industrial lease rates. Any landlord looking to convert their centers also would need the approval of their lenders, city officials, neighbors and, in many cases, the center's other retailers. Some mightn't appreciate the increased truck traffic and decreased shopper traffic.

“These types of conversions were once unthinkable, and now they're not only happening, they're gaining traction,” said Adam Mullen, Americas Leader of CBRE's Industrial & Logistics business. “That industrial uses can overtake what are usually higher-rent uses illustrates the strength of demand for industrial real estate, especially last-mile distribution centers.”