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The ongoing bankruptcy and liquidation of Toys "R" Us stores serve as a stark reminder that the era of brick and mortar retail is on the decline. Toys "R" Us will, like many retailers before it, soon be gone. But what is going to happen with all of the empty retail space in those shopping centers, malls and unoccupied stores?

The Scope

The meteoric rise and the spectacular fall of the indoor retail shopping mall took place over the course of a single generation. The first of what consumers would recognize as a modern mall was designed and built in the fifties. The last was constructed in 2006. As time has passed, hundreds upon hundreds of hulking and sprawling malls sit empty across the American landscape. Of the 1,000 malls still open, some 25 percent are in imminent danger of being shuttered and vacated soon.

Single tenant buildings and "strip malls" are not faring better. Sears and Kmart will be closing 103 stores this year, Macy's will be closing 11 and Sam's Club will be shutting down 63 of its warehouse stores. Best Buy is closing all 200 of its mobile phone stores and JCPenney is shutting down eight locations. The Gap and Banana Republic have announced 200 closings, and this is just a partial list. The universe of abandoned retail space is ever expanding. Without owners and tenants to maintain and upgrade them, millions of square feet of empty space exists as unproductive real estate.

Retail real estate is not easily converted to other, higher uses. They include unique designs with large, mostly useless atriums for foot traffic and centralized industrial scale utilities. However, their flat faced facades are meant to be seen from distant highways and the predominance of reinforced concrete as an almost exclusive construction material making complex conversions prohibitively expensive.

Empty retail space is square footage-intensive. For example, the average Sam's Club store is 134,000 square feet — and more than 60 of these behemoth buildings will soon be dumped on the market. The smallest of the 800 Toys "R" Us buildings being vacated is 30,000 square feet. One of the biggest challenges will be finding companies that can productively use all of that space.

Self Storage

Self storage companies are prime candidates for retail redevelopment. Self storage requires a lot of free floor space and benefits from the easy highway access. Further, converting retail to storage is an easy fix as it can easily be divided up and repurposed. The existing plumbing and utilities are more than sufficient for self storage.

While the brick and mortar retail is in inexorable decline, the self storage industry appears to be in ascendance. With self storage vacancies at an all time low, banks are eager to fund self storage projects. The amount of money being dedicated to storage construction is at an all time high and this unique industry is poised to take advantage of the glut in retail real estate.

Fitness

Health clubs and fitness centers are a $26 billion dollar a year business in the United States. More than 55 million Americans are members of the more than 36,000 local gyms. Fitness clubs are highly adaptable to retail properties. The key to this adaptation is, once again, ample floor space — for gym equipment, weights, fitness machines and exercise classes — and easy conversion.

The big fitness firms such as Gold's Gym (with more than 700 locations) and Planet Fitness (with over 1,200 clubs) are adding 3,000–5,000 members a month. The sheer availability of rentable space is the catalyst for gyms moving into empty retail space. This trend is expected to continue for as long as fitness growth patterns continue.

Healthcare

Another sector with a huge appetite for square footage is healthcare. Large medical providers are taking over entire empty shopping malls and turning them into state-of-the-art facilities. Former malls and big box retailers are large enough to accommodate emergency care, routine check-ups, hospital facilities, wellness programs and more.

A generation of aging baby boomers is providing the healthcare industry with all of the clients it can handle as well as money for expansion. The ongoing collapse of retail will provide the space it needs to grow.

Mixed Use

It's time to think outside the (big) box when it comes to vacant retail properties. Savvy developers are turning old retail properties into community destinations. Many buildings — that are purely retail — will be reborn as mixed–use properties that will offer something for everyone. New designs include playscapes and indoor parks for the kids, office space, upscale restaurants, churches, meeting rooms, fitness centers and even health centers.

Unfortunately, the expense involved in rehabilitating such a large quantity of buildings guarantees that the issue of empty retail space will persist for several decades.

To discuss all the insights retailers need to grow their businesses in the face of ecommerce, contact Norm Nichols at Norman_V_Nichols@keybank.com or 518-257-8576.