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March 13, 2013
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Big box solution: Create smaller boxes

Owners of retail buildings in the Reno-Sparks area are getting creative in their efforts to refill vacant big box spaces, subdividing large, dark retail spaces to land tenants.

Examples include:

• The former Mervyn’s building in Sparks, now home to Ross Dress for Less and Fallas Discount Stores

• The former Longs Drugs in Sparks, now home to AutoZone and 99 Cents Only

• The former Scolari’s store in Lemmon Valley, soon to house Big Lots! and Grocery Outlet.

It’s a model that may crop up more often as the vacancy rate in big retail spaces — those of 20,000 square feet or more — stands at 15.4 percent in the Truckee Meadows. There’s a total of 8 million square feet of those spaces in the region.

“Landlords are being very flexible on what it would take to reposition those properties for the right-sized tenants,” says Kelly Bland, senior vice president and a principal with the retail team at NAI Alliance in Reno.

One of Bland’s specialties these days is finding new tenants and new uses for big-box spaces.

He worked with the building owner of McCarran Plaza at Prater Way and McCarran Boulevard to land two new tenants to the aging center. AutoZone absorbed 17,000 square feet, while 99 Cents Only took 18,000. The building’s façade and interior were remodeled as well to modernize that portion of the center.

Certain spaces make more sense than others to subdivide, Bland says. Often, with older centers, building owners have less debt and can more easily undertake the expense of extensive tenant improvements.

“It is just a function of economics on the lease rate and what amount of money it takes to put into it,” Bland says. “Some spaces also are easier to break up than others — it depends on how the building was originally designed and the dimension s of the building.”

Subdividing a big box space is much more complicated than simply erecting a floor-to-ceiling interior wall, notes Ken Mattison, senior vice president for the retail services group at Coldwell Banker Commercial Clay & Associates. It’s an extremely cost-intensive improvement process that includes construction of new entryways, and more importantly, splitting a building’s heating and air conditioning systems, water, electrical and other utilities, in addition to any necessary interior improvements.

Despite the costs, savvy landlords will look at any opportunity to land tenants and continue to build the flow of traffic to their centers, Mattison says.

“(Subdividing) has become a little more visible because of the number of big boxes that are out there right now,” he says. “This is a trend that we will continue to see.

Wider big box spaces work much better than narrow spaces for subdividing since stores don’t want minimal store frontage, Mattison notes. The model works best in junior anchor or standalone spaces in the 24,000-square-foot range and up. Slightly smaller spaces — such as the Old Navy stores soon to go dark in Sparks and Reno — probably won’t make fiscal sense to subdivide.

Tad Loran, senior associate with the retail group at Avison Young, says there’s a trend by national retailers to downsize. Walmart, for instance, has said it may look to Reno to develop its Walmart Neighborhood Market concept — stores run about 42,000-square-feet on average. Best Buy in 2012 said it will shutter 50 of its big box stores in favor of much smaller storefronts as a means to reduce overhead expenses amid dwindling profits.

Some of those reduced storefronts may include subdivided space.

“With more larger stuff coming on the market, and more nationals looking smaller, it’s a trend that will continue,” Loran says. “Landlords have got to get spaces occupied one way or another. They need to adapt and do what they can to be successful.”

Despite modest signs of improvement in the regional economy the past few years, the retail sector has shown little improvement. In 2012, net absorption for the year was just under 45,000 square feet as venerable stores such as Ben Franklin Crafts, Scolari’s in Lemmon Valley and Office Max in Sparks closed and left large spaces dark. In all, 139 tenants moved out of retail spaces in 2012, says NAI Alliance in its year-end retail market report.

Overall retail vacancy, in spaces large and small, at the end of 2012 was 18.52 percent. A stabilized vacancy is in the 9 percent range, NAI Alliance says.

“There is a tremendous amount of vacancy out there,” Bland says. “It will take a lot of creativity and a lot of time to repurpose those properties, and we will need to be doing multiple different things with those properties. Subdividing is one of those ways we will absorb some of that inventory.”

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Northern Nevada Business Weekly Updated Mar 13, 2013 01:19PM Published Mar 18, 2013 10:03AM Copyright 2013 Northern Nevada Business Weekly. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.