No Vacancy: 5 Creative Solutions for Empty Spaces

With vacancy rates reaching 20-year highs, leasing brokers and managers have to start thinking creatively.

April 1, 2010

If you have some vacant space to fill, you could . . .

1. Become a patron of the arts. From museums in shopping malls to artists’ studios in warehouse spaces, cultural outposts can bring in revenue, foot traffic, and positive publicity. Another option: Donate vacant space to a nonprofit, and the property’s owners can get a tax write-off.

Case Study: The upscale Galleria shopping center in Fort Lauderdale, Fla., was left with 8,000 square feet of empty space when Sharper Image closed its doors last year. Meanwhile, the well-established Fort Lauderdale Children’s Theater needed space for rehearsals and classes until it could construct a new building downtown.

The not-for-profit theater signed a three-year lease for the space in April 2009, and the arrangement has worked out better than either party ever expected, says Melissa Milroy, the Galleria’s marketing manager. The theater is benefitting from exposure to the mall’s clientele and parking, and the mall has been able to boost foot traffic in an area where an anchor had gone dark.

"The theater attracted people to the center from beyond our primary trade," Milroy says. And because the theater does its own marketing, the center gets added promotion at no cost."

The mall’s stores and restaurants—from fast food spots to the high-end Capital Grille—have all reported more business. Now the theater and mall management are discussing turning that empty anchor into a permanent 500-seat theater.

2. Get behind health. Greater focus on preventive health care may be a boon for fitness clubs.

Case Study: Health clubs and shopping centers are a perfect match, says Matt Harding, president of Levin Management Corp. in North Plainfield, N.J. In his experience, frequent visits and day-long foot traffic from patrons of workout facilities help bolster traffic at malls.

"People are trying to make the most of their time," he says. "In one visit, they can work out and shop."

His latest health club leasee is No Body Denied, which filled 21,500 square feet of space left vacant by Office Depot in the 75,000-square-foot Echo Plaza in South Plainfield, N.J. Most fitness centers require an expensive buildout, so a 10-year lease is needed, Harding says. With that in mind, check a tenant’s financials carefully, Harding advises.

3. Sell off the space. Selling a vacant portion of a property can be a great way to get a cash infusion and boost occupancy.

Case Study: Derek Doke, senior vice president of Colliers International in Seattle, has been selling commercial condominiums since 2003. It wasn’t until the market softened, however, that Doke realized that "condo-izing" a vacant part of a commercial property could be an alternative for owners struggling to meet debt service.

"Lenders like the option because it reduces their financial exposure, and it gives owners a cash infusion without the need to sell the entire property," Doke says.

Most any commercial building is a candidate, although newer properties that already have submeters, parking, and adequate restrooms make for simpler transactions, says Doke. It typically takes four to eight months to negotiate an unencumbered title with the lender, prepare the legal documents, and perform due diligence before units can be marketed.

4. Shift to mixed-use. Adding office uses to the retail mix not only absorbs vacant space but provides a ready-made clientele for the remaining retail tenants.

Case Study: The 673,000-square-foot Mountaineer Mall in Morgantown, W.Va., has been reinventing itself for two decades. That’s when it first started losing retailers to a newer cross-town rival, says the mall’s General Manager Kathy Linton. Although the mall still has retail users, including a Subway, a Giant Eagle grocery, and a sporting goods store, about 40 percent of the space is occupied by office tenants.

The first was a Social Security office, and now a call center employs 700 in a former Montgomery Ward building. Finding ways to manage parking for all the employees is a challenge, says Linton, who’s designated remote parking for office users so that retailers’ customers could pull into closer spots.

"Office uses have helped us survive and thrive and keep the mall a viable property," she says.

5. Find recession-resistant tenants. Do some research into what industries are faring well in your market despite the economy, and seek out companies in those sectors to fill vacancies.

Case Study: Americans doled out an estimated $45.4 billion on their pets in 2009—the highest amount ever, according to the American Pet Products Association. That makes pet-focused companies a good target.

"When pets are sick, people are willing to spend," says Gene Carlin, executive vice president of Danac Corp., a real estate development company in Bethesda, Md. Carlin and his company were faced with a challenge in 2008, when major tenant CompUSA closed its 27,000-square-foot store in Gaithersburg, Md.

Danac, which created the build-to-suit space a decade earlier, found there weren’t many retailers in the market for such a large space, even though it was a great location right off a major expressway. Then an alternative option emerged.

"We talked to several retailers, but after a few rounds of negotiation, it was clear that Veterinary Centers of America was the strongest option," Carlin says.

The national vet chain, which operates over 400 specialized animal hospitals complete with chemotherapy, MRI scanners, and hydrotherapy pools, signed a 10-year lease. After a $5 million buildout, less than 20 percent of which was contributed by Danac, the new veterinary center opened in August 2009 and is running 24/7. Talks are already underway about adding more space.