Former big-box stores pose challenges, opportunities

When the Kmart in southwest Cedar Rapids closed in late April, it added to an ever-growing inventory of empty "big boxes" in the Corridor and the nation.

As Best Buy, Home Depot, Kmart, Sears, Target, Walmart and other regional and national retailers close underperforming stores or move to larger buildings, millions of square feet of commercial real estate is going dark across the country. That's creating a host of challenges and opportunities for communities, property owners and developers.

"If there's a big box sitting empty, it's probably not a prime location," said Gerry Ambrose, a Coralville developer and real estate broker. "The building depth is really an issue. Big Box users want a building that's deep because they get more bang for their buck with less frontage.

"If you try to convert a big box, you get people who typically want only 65 feet to 75 feet of depth. Strip centers are built to that depth because there's a lot of 1,200-square-foot tenants who don't want a store that's 200 feet deep."

Ambrose said conversion of a big box store from a single user to multiple tenants also presents other challenges.

"Sewer, water and electricity have been run into one corner of the building and now each tenant will want their own utilities," he said. "That means cutting the floor after you decide how you're going to divide it up into increments for each tenants.They also will want their own heating and air-conditioning units and individual controls.

"You also will need to reface the front of the building to look decidedly different if you're going to refurbish and reinvent it."

Sometimes, it makes more sense to demolish a big box store and start over.

"We bought the Big Lots building (on the perimeter of Westdale Mall) with the intention of redeveloping it," Ambrose said. "We looked at a number of options for it and realized that what we would get for it didn't make sense. It was more cost effective to tear it down and use the land to build something else.

"I think Edgewood Station has proven that it was the right decision. We have everything leased except for a pad space."

Ambrose, along with Hunter Parks and Wayne Meier, in 2004 successfully redeveloped a former ShopKo building at 4700 Tama St. SE.

Meier took 44,000 square feet of the 119,000-square-foot building for his Midwest Athletic Club. Ambrose said the developers were fortunate that the owners of Infinity Contact needed a large open area for a customer contact center and offices.

"Carpetland was looking at the same time and we were able to negotiate the end cap for them," Ambrose said. "We had done a nice remodel for a furniture store that went out of business and my fiance's mother knew the owner of Elegant Repeats. Their building on Second Avenue had been bought by St. Luke's Hospital and we were able to negotiate a lease for the former furniture store space.

"Hancock Fabrics is the only tenant that has stayed there all this time."

Ambrose in 1997 redeveloped the former WardWay Plaza at 1101 S. Riverside Dr. in Iowa City.

"Montgomery Ward actually had a second floor that it was using for a warehouse," he said. "We put in a passenger elevator and turned it into a health club. Fin and Feather is located in the first floor along with Arby's and a number of other tenants in what was originally an Eagle supermarket.

"When we purchased that property, it was about 25 percent to 28 percent occupied. Now, it's 100 percent occupied and we're leasing space in the parking lot."

While conceding there are challenges to refurbishing and converting large empty former retail buildings, Scott Olson of Skogman Commercial Real Estate Services Group in Cedar Rapids said developers are warming to the opportunity it presents.

"The national chains looking for a potential store location will take 30,000 square feet to 60,000 square feet," Olson said. "Whole Foods takes 30,000 square feet, Burlington Coat Factory wants 50,000 square feet and Hobby Lobby takes 50,000 square feet.

"There's a series of large users that can use that type of space and normally they want the lower rent of $6 or $7 per square foot -- triple net. A bix box is normally acquired fairly cheap and can offer that kind of rent."

A triple net lease requires tenants to pay their portion of all real estate taxes, building insurance, and maintenance as well as rent, utilities and upkeep of the common area of a building.

Olson, also a member of the Cedar Rapids City Council, said big boxes conversions are looking more attractive as the retail economy shifts into recovery mode.

"There have been several articles in national publications that big boxes are good investments for real estate investment trusts," he said. "The REITs are buying them, hacking them down into two or three spaces, and finding national tenants that want to lease them."

In some cases, property owners are not in a hurry to find new tenants or divide buildings into smaller spaces.

Spatz Centers of Chicago, the owner of the former Kmart building at 2727 16th Ave. SW, will continue to receive rent from Kmart until November.

Westwood Hudson Holdings, the owner of the 65,248-square-foot former Econofoods building at 2020 Edgewood Rd. SW, is continuing to receive full rent from Nash Finch, owner of Econofoods, for several more years.