Partners, Volume 15, Number 2, 2005

The Ghost-Box Dilemma: Communities Cope with Vacant Retail Property

Big–box stores are a familiar presence in communities nationwide. Increasing numbers of chain establishments, changing consumer preferences, and growth in the retail industry have led to an abundance of retail space. This rapid expansion has also multiplied the number of vacant big boxes littering the landscape.

Wal-Mart, Kmart, Home Depot, and Office Depot are a few of the big-box retailers that have become household names. While these retailers have different store prototypes, each occupies a concrete “big box” of 25,000 to 100,000 square feet which is usually surrounded by acres of surface parking lots. At the far extreme is the Wal-Mart Super Center, which is typically about 220,000 square feet.

Big-box retailers can anchor commercial centers or be freestanding. A commercial center consisting solely of big-box retailers is known as a “power center.” Initially big-box retailers sought rural or suburban locations that offered large tracts of inexpensive land to accommodate their building and parking requirements. These locations also allowed the retailers to reach a larger, and often underserved, market area.

Recently, however, big-box retailers have started exploring urban markets. Wal-Mart and Home Depot, for example, have both begun developing a smaller neighborhood format in hope of gaining access to dense urban areas.

Assessing the impact of big-box retailers on local communities
Local communities initially recruited big-box retailers to increase property and sales tax revenues and to meet growing consumer needs. Some communities assisted the retailers or the developers with infrastructural improvements, while others used tax incentives to encourage development in their communities.

A 2004 study by Good Jobs First (www.goodjobsfirst.org) identified 244 Wal-Mart stores that received public subsidies totaling over $1.0 billion from communities where they opened stores or distribution centers. This range of subsidies included reduced prices for land, infrastructural assistance, property tax abatement, state corporate income tax credits, and tax-increment financing.

These policies are now being questioned as more communities re-evaluate the positive and negative impacts of big-box retail. One of the primary concerns is the rapid growth of vacant big-boxes as retailers that were once lured to communities depart or relocate to newer retail spaces.

The rise of ghost boxes
Vacant big boxes, or “ghost boxes” are on the rise for several reasons. First, developers created an abundance of retail space during the past two decades, and in some communities retail space now exceeds the capacity of local markets to support it. Second, poor economic performance has forced retailers to close a number of their stores.

Kmart has closed over 600 stores since it declared bankruptcy in 2002. Other large retailers including JC Penney, Montgomery Ward, Sears, and various grocery chains have also been forced to close some or all of their stores as a result of financial trouble.

Discount retailers are also changing their store formats and abandoning existing buildings for much larger mega-stores. Wal-Mart’s new super centers are usually twice the size of their discount stores and have expanded to include a full-service grocery store.

Wal-Mart currently has 350 buildings available for sale or lease. According to its website, the company is planning to continue its aggressive growth and expects to open 530 new stores in the coming year. Of these new stores, 160 will involve expansion or relocation of existing stores, thus ensuring continuous generation of Wal-Mart ghost boxes.

Wal-Mart’s unique business strategy also contributes to the increase in empty stores. In growing areas the company has sometimes opened two stores in close proximity in order to capture the majority of sales in the market. Conflicting rationales have been cited for this strategy. Wal-Mart’s annual report says this approach allows them to more than double their sales in the area.

Other studies indicate that close proximity of two stores creates internal competition because managers know that only the most profitable store will survive. The net effect of this strategy, however, is heightened potential for empty stores, often at the expense of the smaller and independent retailers that are unable to compete.

Ghost boxes weigh on communities
Vacant big boxes can have a negative impact on the community landscape as well as on neighboring businesses. Abandoned buildings and empty parking lots are not only unsightly, but they also become targets for vandals and attract other undesirable activities. The empty space also becomes a visible sign of economic decline and disinvestment.

In addition to the visual impacts, departure of a large retailer may strain other area businesses. Surrounding businesses often rely on traffic generated by larger retailers, so when the retailer departs or relocates, the dependent businesses may be in jeopardy as well. Smaller retailers in shopping centers may hold leases that allow them to vacate if the anchor tenant departs. Loss of a big-box retailer can thus trigger the decline of an entire shopping center.

Finally, the local economy may experience a loss of tax revenues when a retailer pulls out. Property taxes may decline if the space remains vacant, and significant loss of sales tax is likely if the departure of the retailer triggers loss of other businesses as well. The many communities that have used public subsidies to lure big-box retailers at the expense of local business are especially vulnerable.

Adaptive reuse of ghost boxes
Vacant big boxes present a new challenge for communities as they search for creative ways to reuse the space and try to limit the negative effects of existing and future vacancies.

Numerous communities across the country are managing to reuse big-box space. In some cases, other retailers have absorbed the space. For example, Wal-Mart has established a partnership with Hobby Lobby, Tractor Supply Company, and Burlington Coat Factory to reuse vacant Wal-Marts. Over the past ten years these retailers have purchased over 100 vacant Wal-Marts and converted the space to meet their store requirements.

Wal-Mart has created its own realty division (www.walmartrealty.com) to market their vacant properties. In addition to leasing and sales, this group provides market research and construction services to help new tenants make use of the space. Wal-Mart also works with local government to identify businesses that might be interested in the space when Wal-Mart vacates. Wal-Mart’s website cites that it recycled over 15 million square feet of space last year and contends that in doing so it has developed another business opportunity.

When retail business isn’t the most effective use for vacant big boxes, communities must explore other creative strategies for the space. For example, big boxes have been converted to government complexes, call centers, schools, churches, auto dealerships, storage facilities, medical facilities, museums, recreational facilities, and office space.

In Lee County, Florida, two former Kmart stores are being converted to schools. The stores fit the prototype for the school district’s elementary schools, and the conversion is expected to take only half the time of new construction.

Communities have transformed abandoned big boxes for creative uses. This Kmart in Austin, Minnesota, was converted to a “Spam Musuem.”

Challenges to adaptive reuse
Some communities have been very successful in reusing their vacant big boxes, while others have struggled. Smaller stores (under 30,000 square feet) are usually easier to adapt than those over 50,000 square feet. It is also easier to re-lease a store located in a prime location with good parking, infrastructure, and road access, and in close proximity to other successful retailers.

A number of problems arise in attempting to recycle vacant big boxes. First, most retailers have a store prototype that is unique. Therefore they reject existing vacant space because it does not meet their store format requirements. For example, since Wal-Mart has a larger format than Kmart, it is not a candidate to relocate in the 600 vacant Kmart stores. Retailers often prefer building on vacant land instead of incurring the cost to rehabilitate existing space.

Secondly, retailers may place restrictions on which tenants can occupy their space when it becomes vacant. Some may continue to pay rent to keep a competitor from moving into their space, thus reducing the landlord’s incentive to re-lease or adequately maintain the property.

Finally, retail may not be the best use of the vacated space. For landlords, this poses an additional concern if they rely on income from national retailers to support their shopping centers. However, converting space to a different use presents a challenge. Only a few businesses need the amount and type of space left behind by these mega-stores, but it can be expensive to convert the space to a different format and use.

How else are communities coping?
Despite examples of innovative models for reuse of vacated big boxes, more communities are starting to consider the potential impact of large retail developments before they are built. Some communities have instituted size caps that limit big-box development or ban additional development once a pre-determined limit is reached.

A number of communities are now requiring retailers to complete comprehensive community and economic studies that consider the impact of the proposed development on jobs, tax revenue, infrastructure, or existing businesses prior to approving new development.

The City of Los Angeles recently passed an ordinance requiring big-box retailers with a grocery component to conduct a community impact study that includes a plan for re-leasing, reusing, or selling vacated properties. Some communities have passed ordinances requiring retailers to assist with the costs of building demolition if a store remains vacant for a long period of time.

In other examples, cities are requiring retailers to notify city officials in advance when they intend to vacate a property and to maintain it until it is re-occupied or sold. In Peachtree City, Georgia the city passed an ordinance that prohibits retailers from voluntarily vacating a building while preventing occupancy by another tenant.

In addition to regulatory restrictions on development of new big boxes, some communities are creating financial incentives for the reuse of existing buildings. In South Carolina, legislation was proposed recently that would offer tax credits to developers for reusing vacant stores larger than 100,000 square feet.

Looking ahead
Big-box retailing has changed consumer shopping and altered the landscape of communities. With no foreseeable end to the growth of mega-stores, ghost boxes will continue to multiply and present challenges for their host communities.

First, communities must identify creative uses for existing ghost boxes. Second, they must ensure that any additional development is managed in advance to minimize the number of future ghost-boxes and their negative impacts. Finally, communities must evaluate whether continued growth of the national big-box retail industry is desirable, or whether alternative strategies might exist to encourage more sustainable long-term economic growth for their businesses and residents.

This article was written by Jessica LeVeen Farr, regional community development manager at the Atlanta Fed’s Nashville branch.

Readers can learn about other examples of the adaptive reuse of big boxes at the following website: http://www.bigboxreuse.com

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