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Big boxes shrink their parking lots

By
Commercial Real Estate Agent with Paul Johnson and Associates

This is not a new concept and many shopping centers and strip centers have been taking advantage of their surplus of parking lot area.  You can see the space at Radford Hills being developed for a Pizza Inn.  Even uses like ATM's and Water receptacles that take up a smaller footprint have been popping up for years.

You can expect to see more of this type of development by established businesses looking to raise cash with surplus property.

- Erik Johnson

Parking Spaces for Sale: No Carryout Allowed.

By Steve McLinden

Well, that may not be quite the way Home Depot and other big-box retailers are marketing their excess parking spaces. But market them they are.

At last fall's ICSC Southeast Conference, in Atlanta, Home Depot identified portions of parking lots up for sale at hundreds of its stores, including 25 of its 90 Georgia sites.

Given the slowdown in new store development, Home Depot is "trying to fully utilize assets to their highest and best uses to add value to the portfolio," said Mike LaFerle, Home Depot's vice president of real estate. Other big-box chains that own their acreage are likely to be doing the same, if they have not begun doing so already, sources say.

When many big-box stores were first being built, municipalities tended to err on the side of requiring too many spaces, to accommodate those rare peak-volume days, LaFerle says. "So at some Home Depot stores, we knew we had more parking than we needed and that some areas of our parking lots were underutilized."

Today many of the same municipalities realize those original requirements were excessive. "I think they are now receptive to adding additional retailers to those spaces to provide value, jobs and tax revenue," said LaFerle, who dubs the parking space sale a "carve-out" program.

With the right complementary use, the carving out of new pad sites on a Home Depot property should drive additional sales for the store, LaFerle says. Further, he says, the program has an aesthetic upside, because it will replace chronically underused, mostly barren asphalt with new uses and landscaping. Among the most likely candidates to buy these sites are fast-food and fast-casual restaurants, banks, drugstore chains, medical clinics and automotive businesses.

The typical Home Depot store encompasses about 12 acres, although that can vary from municipality to municipality, LaFerle says. Home Depot store real estate is valued at roughly $500,000 per acre, according to Colin McGranahan, an analyst at Bernstein Research.

Brian Glaser, who heads Weitzman's Dallas-Fort Worth commercial retail division, has over the years marketed several outparcels on big-box lots for owners. "I think we will see more and more of that with these super-large block players who own their own real estate," he said. "If you've got 600 spaces, there's no problem with carving out an outparcel and making some money."

Though the strategy seems destined to become a trend among big-box stores, it is really nothing new, says Al Williams, a principal of Excess Space Retail Services. "Kmart owned a lot of their real estate and was able to create shareholder value by selling off underutilized spaces years ago," he said. "On a macro level, it's a very effective strategy. In fact, it is the retailers' fiduciary responsibility to maximize their real estate. And in this case, this is a way of driving what we call sleeping revenue."

BJ's Wholesale Club, Costco, Kohl's, Lowe's Home Improvement, Shopko, Target and Wal-Mart are among those that could follow the same strategy, or which have already done so. Most of them have more parking space than they need, and some bought the excess for investment purposes, Al Williams says. When Target demolished its small-format store on Cooper Street in Arlington, Texas, a decade ago to build a superstore, it was able to reconfigure its ample parking lot to add a Corner Bakery and a few in-line spaces.

The sort of property sale Home Depot has in mind is more than just a short-term strategy, says Doug Stephens, president of Unionville, Ontario-based Retail Prophet Consulting. "I think it could be a harbinger of the end of suburban power centers as we know them," Stephens said. "Home Depot and other big-box players are at the end of a 20-year run fueled by baby boomers, and boomers are hitting the age where they are downsizing." The next generation, called Gen-X, is 15 percent smaller, he notes. "So even if Gen-X went absolutely crazy and did a credit run-up, they still couldn't replace them."

The changed economy sees a number of large retail chains experimenting with smaller-format stores. In Home Depot's case, "the heyday of home renovation is over, and the chain finds itself overinvested in massive store sites that won't be able to produce at previous levels, even in a recovery," Stephens said. "When you start selling your parking lot, it is an admission that you are never going to bring that parking lot back to those peak days." Indeed, last year Home Depot announced that it had scaled back expansion plans and would add only 1.5 percent in retail square footage annually for the next several years.

Some retailers who had not considered this space-selling strategy in the past are considering it now because it creates a reduced basis in the property, says Kirk Williams, associate director for retail services at Cushman & Wakefield. "It's not just the outparcel user who can benefit from this - the right complementary user can make the big box's sales jump as well," he said. "But the thing is making sure you choose the right one. It is all about trying to get the most out of what you have, and you have worked hard to create this destination, so why not?"

Some center owners Cushman & Wakefield represent say they are open to community events being held in their parking lots. "We have seen it in regional malls, why not in large parking lots? That's just another way to drive activity," Kirk Williams said. Moreover, it has not been uncommon for big-box stores to lease their excess spaces over the years for a variety of uses ranging from commuter park-and-rides, car shows, concerts, farmer's markets and the like, he says. Retail consultant David Livingston, who heads DJL Research, says he has seen parking lots used for overnight recreational-vehicle parking, outdoor roller-hockey league games and camps for migrant workers.

Anchors in regional malls typically do not have the same latitude to sell or lease their excess parking spaces, even if they own their lots, because most mall anchor restrictive-use agreements do not allow it, says Glaser.

Big-box retailers that have occupied the same space for many years are much more apt to start parceling off pieces of their lots than newer stores, says Glaser. "Early on, they wanted maximum visibility," he said. "Most of their customers are local and have followed the same path since the inception of the store, and they know where it is without having to see it from the street."

Home Depot's carve-out sale applies to stores in the U.S., Canada and Mexico. The chain owns about 90 percent of its roughly 2,200 stores and is actively seeking end users for its parking lots, rather than developers. Consequently, it is handling the sale in-house, says LaFerle. Inquiries are being directed to Chuck Coker, director of real estate for Home Depot's northern region.

Posted by

Erik Johnson, CCIM
Paul Johnson & Associates
4633 South 14th
Abilene, TX 79605
325 698-5661 office
325 692-8508 fax
325 439-0186 mobile
Erik@PaulJohnsonRealtors.com  
www.pauljohnsonrealtors.com

Jeremy K. Frost
Keller Williams Realty - Dripping Springs, TX
Associate Broker, ABR,CNE,CRS,ePro,PSA,RENE,SRS

Thanks for sharing...it's great posts like this one that make active rain such a great place!

Jan 22, 2010 01:48 AM
Andy Chaudoir
Professional Inspection Services - Georgetown, Texas - Georgetown, TX
Your Home Inspection Connection in Central Texas

Hello Erik - Thanks for the post.  I know it's an older post but still great information.  Have a great day.

Mar 24, 2014 11:42 PM