Big Box Retail Is Far From Dead

Big box retail is far from dead. Sure, retail has evolved tremendously this cycle—shifting to more experiential formats in street-front spaces and mixed-use complexes and a focus on restaurants, grocery and standout boutiques that are Internet resistant; however, strong sales in discount retailers and fitness centers are driving big box activity. In San Diego, this activity has produced healthy absorption and even some build-to-suit development. According to recent research from CBRE, big box absorption surpassed 300,000 square feet in the second quarter with a total of nine lease deals, all lead by fitness and discount retailers.

“The big box absorption is probably average for us. Most of the tenants that are occupying those spaces are discounters or fitness uses,” Reg Kobzi, an SVP at CBRE, tells GlobeSt.com. “The discount retailers are coming in with great earnings for the last quarter. The quarter was the best earnings they have had in a decade. Big box retail is not dead if you look at those earnings. They are really driving big box absorption.”

While absorption activity was healthy in the second quarter, the market continues to have 1.8 million square feet of vacant space, a total of 26 boxes. However, Kobzi says that is an inflated number. “More than a third of the vacant space comes from two boxes, Sears and Nordstrom at UTC,” he explains. “That skews the numbers a bit. Those two spaces make up 325,000 square feet of space of the 1.78 million that is out there. Then, part of the big box inventory are sublease situations. So, they are sublease situations with rent still coming in. You could probably take out another 100,000 square feet of space as a result of those sublease spaces.”

The Toys R Us closures could be a major disruptor for the big box activity—and is an event that many markets are watching closely, including other Southern California markets. However, most if not all of the Toys R Us boxes in San Diego have already been taken. “The Toys R Us in San Diego have been spoken for already. There are currently deals active on most if not all of them,” says Kobzi. “At the end of the year, I expect that those will all be absorbed. The real estate that Toys R Us had is pretty good real estate in San Diego, so I would anticipate seeing those absorbed quickly.”

With a significant supply of big box space in the market, the new development activity is surprising, and the CBRE research shows that it could impact leasing activity later this year. Kobzi, however, says that the development is all build-to-suit projects in residential markets, and shouldn’t impact leasing activity. “There are one-off boxes getting built, but we aren’t building them speculatively,” he explains. “When you see big boxes come online, they have been preleased. It could also be situations that include the redevelopment of a center to build a bigger center or a bigger anchor. Some owners are doing that to get bigger boxes and attract discount retailers.”