Retail repurposed

Adaptive reuse in Des Moines through the lens of three local developments

by Sarah Bogaards

Repurposing commercial real estate for another use, also known as adaptive reuse, is not a new concept. 

Every major city holds at least a few examples of historical structures that have been preserved and given a new life, but adaptive reuse has spread beyond that niche.

Nationally, all sectors of commercial real estate have experienced the trend and have seen new reuses emerge, from warehouse and distribution spaces turning into breweries or indoor agriculture facilities to vacant hotels becoming offices or housing.

As consumer behaviors change, adaptive reuse allows spaces to transition with them. For the retail market specifically, that means repurposing traditional malls and shopping centers.

In Foothill Ranch, Calif., a former JoAnn’s Fabric Store was transformed in 2020 into the 45,000-square-foot Hoag Health Center, which offers a comprehensive array of services, a laboratory and an imaging center. The Highland Mall in Austin, Texas, is being redeveloped into a mixed-use project, including a new college campus as well as office, retail and residential spaces.

According to national data from CBRE, availability of mall and lifestyle retail space rose to 6.9% by the end of 2021, while overall retail availability fell in Q4 to a 10-year low of 5.6%, 1 percentage point lower than 2020.

A report from Matthews Real Estate Investment Services said the pandemic has accelerated the need for malls to reposition themselves, and adaptive reuse provides a pathway to reinvention.

The changes in retail and consumer behavior are not necessarily away from in-person shopping, but away from indoor malls. Outdoor options like outlet malls and retail centers are now favored, the report says. 

Even before the pandemic, adaptive reuse was viewed as an area of growth. The CCIM Institute predicted in a 2018 report that adaptive reuse would make up “a greater percentage of investment activity than self-storage and other select non-core property types by 2023.”

Adaptive reuse still has a strong outlook in the context of the pandemic. The Matthews report said adaptive reuse is set to become a “a stand-alone asset class post COVID-19,” and the CCIM Institute has forecast that repurposing of retail centers and malls will be “the most impactful trend” in the retail sector by 2025.

While regions like California, New York and Florida are expected to be the largest players in adapting malls and retail centers, these projects are already taking place and affecting markets across the country, including Des Moines.

Bill Wright, senior vice president with CBRE|Hubbell Commercial, said the typical vacancy rate for local big-box retail spaces has been between 5% and 7%, which is where it was until the start of 2021.

The rate began to fall at the start of last year, reaching 2.9% by the end of the third quarter, and CBRE reports adaptive reuse projects have contributed to the decline.

Also driving the trend was an interest in climate-controlled storage space, either built new or converted, Wright said.

He also said the Des Moines metro retail market “has fared very well” through the pandemic, partly because the area has not overbuilt retail spaces as in some other parts of the country.

A surge of unanchored neighborhood retail centers about 10 years ago could have led to over-retailing, but those have gradually transitioned to a mix of retail and nonretail tenants like a medical or financial office. There is, however, one exception, he said.

“The mall business, the mall world is changing,” Wright said. “You normally would not have four malls — a Southridge, a Valley West, a Merle Hay and a Jordan Creek — in one marketplace like this.” 

Southridge Mall has been under redevelopment since 2012 with the addition of a Des Moines Area Community College satellite location, a UnityPoint Health medical clinic and more than 300 residential units near the mall, as well as two adaptive reuse projects currently in progress.

Retail Reuses in Des Moines 

Take a closer look at how these and other adaptive reuse projects are transforming Des Moines’ retail landscape. A few projects: 

Genesis Fitness Club is converting the former Sears space at Southridge Mall into a fitness center complete with volleyball and basketball courts, a swimming pool and locker rooms.

Address: 111 E. Army Post Road

Square footage: 108,807

Construction starts: Q1 2022

The U.S. Department of Veterans Affairs’ outpatient medical clinic is moving into the former Toys R Us at Southridge Mall.

Address: 1211 E. Army Post Road

Square footage: 45,515 

Developer: Johnson Healthcare Real Estate, Birmingham, Ala.

Expected completion: Early 2022

Floor & Decor converted the former Gordmans store in Westowne Center in West Des Moines into its only Iowa location.

Address: 1400 22nd St.

Square footage: 78,978

Construction completed: June 2021

Location, location, location

On top of the ways retail was changing before the pandemic, higher construction and material costs and the indelible way the pandemic has changed how we live and work are all spelling changes for adaptive reuse on the side of the developer and the tenant.

The flooring and home improvement chain Floor & Decor began adapting existing spaces “out of necessity,” Ed Smith, senior director of construction, said.

Buying land and building new stores wasn’t an option in the company’s earlier days, so “we looked at anything that’s a 60,000- to an 80,000-square-foot space,” from former big-box stores to warehouses.

Nonetheless, for tenants interested in filling former retail spaces, the top priority is a strong location.

Smith said building in existing retail centers is ideal because they are already well known and visible to the community.

Adam Kaduce, senior vice president and managing director for R&R Realty, said considering only new construction usually relegates tenants to areas that are growing but are less developed and populated. 

“Companies want those good locations, and a lot of those good locations require adaptive reuse,” Kaduce said. “If they don't want to be on the outside of town, they'll have to take an existing facility and repurpose it.”

On the south side of Des Moines, Southridge Mall has remained a focal point of the area’s geography, helped by the gradual redevelopment of vacant spaces since 2012.

This repositioning of the mall as a mixed-use town center appealed to Johnson Healthcare Real Estate as it decided where to relocate the U.S. Department of Veterans Affairs outpatient medical clinic. Johnson Senior Vice President Derek Weaver said the developer was “working off of the momentum” started by Macerich Southridge LLC’s redevelopment of the area.

In addition to larger square footage, Johnson pitched the former Toys R Us space for the new clinic because the location makes it both accessible and welcoming to patients.

“It creates anxiety anytime any one of us goes and seeks health care,” Weaver said. “So if you can invite someone to your facility, and it's a familiar location and it’s surrounded with other goods and services that are available to them so it becomes more of an extension of that [person’s day], there's a lot of value in that,” Weaver said.

The other ongoing big-box store transformation at Southridge is the former Sears department store, where Genesis Health Club is partnering with the city of Des Moines to bring discounted fitness options and sports leagues to an underserved area.

The project is expected to receive up to $9.6 million in tax increment financing assistance that would be paid over a 20-year period, and the Polk County supervisors approved a $3 million loan to the Kansas-based health club in December 2021.

When completed, Genesis’ south-side location will be its 58th club and its 53rd that was converted from an existing space.

Rodney Stevens II, president and owner of Genesis Health Clubs, said repurposing spaces contributes to the success of the company and the clubs. 

“We’ve grown through acquisition, and in this industry, remodeling and revitalization is part of the lifecycle of a health club,” Stevens wrote in an email. “Often, remodeling a health club isn’t that different from a space that had been something else. Once you learn how to do a remodeling project right, it opens up a lot of options.”

The ups and downs of repurposing 

The journey to repurpose a building can be like a do-it-yourself project in many ways. Big-box spaces are often just that — big boxes — so there is a lot of potential but also traditional features to manage.

On the Genesis project, Stevens said the former Sears space provided “a blank canvas” for the new health club, which will be outfitted with five high-school-size courts for basketball and volleyball, a five-lane, 25-yard lap pool, locker rooms and fitness areas.

Stevens said the biggest and most expensive part of the conversion will be raising the roof to meet requirements of regulation tournament play and moving columns to accommodate the courts and the pool. But some decisions were made easy — the location of the plumbing, for example, determined where the locker rooms and bathrooms would be installed.

At the VA clinic across the parking lot, Weaver said it was a “pretty intensive” process to transform the retail space into a clinic fit for medical purposes.

The vast, open space needed to become enclosed rooms like at traditional medical offices, so a large portion of the project was dividing up the space and building out walls. With a nearly 30-year-old building, Weaver said a new roof and replacement of electrical and mechanical systems were also important upgrades for longevity. 

“We had to make sure that the economic life for the building was renewed as part of this redevelopment so that it can enjoy a multi decade role and function for the VA,” he said. 

Matt Cler, vice president of development for Johnson, said to meet medical industry standards and VA requirements, the HVAC systems, as well as security measures, also had to be updated.

The building wasn’t ideal, but Weaver said for this project, the location mattered more. Still, there are some cost savings. Cler said using an existing building saved Johnson from utility and construction costs associated with new construction.

“One of the main things we were able to achieve in cost savings was just purely at the site cost,  because the acreage that we need to build a similar-size facility, [the costs] would have been much greater,” Cler said. “The efficiencies that we get with being a part of a bigger development and that mall complex, we don't have to bring in entrance roads and things that we would normally do if it was a greenfield site.”

In his experience repurposing existing spaces for Floor & Decor, Smith said he’s learned not to expect perfection. When the construction teams got into the former Gordmans in West Des Moines, he said, “there wasn’t much to keep.”

They took out the sprinkler system and removed walls to get old furnaces out, but the biggest jobs were removing a concrete mezzanine and rerouting utilities all shared by the adjacent tenant. These features affected construction on the store’s warehouse space, which needed to be larger than Gordmans’ was to organize and store customer orders.

About 60% of Floor & Decor’s 160 stores have been repurposed from other uses, and Smith said about 15% to 20% of the time an existing space is ideal for converting, but “most of the time it's somewhere in between a perfect space and what we saw in Des Moines.”

There were still significant cost savings over building a new structure, but the bigger perk of adaptive reuse is the speed to market, Smith said. On average, converting a building cuts construction time in half — the West Des Moines store was completed in about 168 days even with the extra renovations.

Although supply chain and labor disruptions didn’t derail the West Des Moines store’s timeline, both were a reality that had to be managed throughout construction. Smith said he dealt with shortages of steel, concrete and other materials and delays in actual building due to workers being sick with COVID-19. 

“With the pandemic, what happened is — let's say, Lennox, who's a HVAC supplier for us — a lot of those people lost factory workers, which crunched their timelines, which, of course, crunched my timeline. … It was tough, because it's not something that we generally dealt with. Since I've been in construction, there's never really been a labor shortage to that degree, there has never really been material shortages to that degree,” he said.

While the pandemic was not a reason for any of these Des Moines projects to opt for adaptive reuse, Tyler Dingel, a senior vice president at CBRE|Hubbell, said he thinks the current supply chain issues could boost interest going forward.

“I think a lot of what's driving that today is just the overall cost of construction,” Dingel said. “The raw material costs, labor costs have really increased over the past 24 months, and with all of the supply chain issues that we face, [for] developers to be able to get more creative and use an existing building and adapt it to a more current use becomes a much more viable option than just building ground up.”

Kaduce said even with more extensive interior renovations, like Floor & Decor had to do, cost savings on exterior infrastructure make adaptive reuse beneficial, especially with heightened costs.

“It's absolutely the case right now, building and construction costs have gotten high enough that those adaptive reuses really make good sense because the building shell and the roof and the infrastructure all has really good value to it,” he said.

Changes in consumer behaviors and expectations stemming from the pandemic also stand to change how repurposed spaces are designed and built.

“We have seen warehouses within the stores increase in size. … So you'll have a showroom that has a lot of your custom products on it, but then a larger portion of the space that becomes warehouse and distribution,” Dingel said. “The big challenge for retailers right now is trying to figure out distribution of their product and shipping and receiving. The consumer has gotten comfortable with being able to get their product ordered, whether that be online or in-store, and have it delivered the next day. So having that product on-site, being able to deliver it quickly to the consumer is very important.”

For developers, the pandemic has resulted in an overall reassessment across real estate sectors of how to approach a space and consider all its possible uses.

“I think it's definitely causing an analysis of how can we make our buildings more adaptable?” Kaduce said. “If we build something, can we make it so that it works well for office? But we might want to make it so that if somebody really likes that location they could put a medical space in there or a retail space or a service-based business.”

Rethinking adaptive reuse

As consumers and companies navigate a life transformed by the pandemic, how they use physical spaces will continue to evolve, but one likelihood is that they will be based more and more on how they create experiences. 

Des Moines’ landscape has already witnessed unique renovations like that of a West Des Moines fitness center into offices for ClaimDoc, a health insurance services company. 

Ongoing projects include the effort to convert the Crescent Chevrolet building in the Sherman Hill area into a brewery and repurposing part of the Eastgate Plaza retail center in northeast Des Moines for a medical clinic.

With Des Moines’ low vacancy rate for big-box spaces, Wright said there will be competition for the “limited supply of premium spaces” in part because of a shift toward pre-leasing sites versus leaving speculative spaces vacant.

That makes malls the main opportunities for unfilled retail space in Des Moines for either new retailers or service-based tenants. Southridge Mall was one of the metro’s earlier adaptive reuse projects, and now its redevelopment and the general trend toward repurposing can be a catalyst to reimagine other malls as places to live, learn, work and play.

Merle Hay Mall is already in transition to a mixed-use space, and Kaduce said Valley West Mall “is going to do the same thing before our eyes.”

“We're going to see adaptive reuse happen at Valley West Mall, and that's likely to take the form of a variety of uses,” he said. “There's a lot of people already looking at what that whole neighborhood and area could be.”

Kaduce and Dingel both said there is evidence coming out of the pandemic that new tenants in retail spaces should fill a niche or provide an appealing in-person experience to draw in consumers.

“We've seen a big increase in entertainment-type uses, nontraditional retail uses, whether that's a gaming center or a place where folks can come together,” Dingel said.” We’ve seen a lot of youth sports that are going into some of these repurposed buildings, but I think during the pandemic and with that number of people still working from home we're seeing a lot of consumers are looking for opportunities to come together and collaborate and meet their friends.”

Kaduce said in cases where a Younkers or a J.C. Penney is taken over by a new retailer, it often takes on a “new form” as an experiential space such as a golf simulator.

“It's really just the evolution of retail where consumers used to want to buy goods, now that trend is changing to buying more experiences,” he said.

R&R Realty has seen the limited retail spaces in the Des Moines market also garner interest from medical users as well, Kaduce said.

Since Des Moines has not over-retailed, he said there is opportunity to add retail and big-box stores as the metro region grows in areas like Ankeny, Altoona and Bondurant and Waukee. Still, he expects mixed-use spaces to strike a balance between big-box and nontraditional retail in addition to other reuses like housing or office space.

“I think about that Younkers store at Valley West Mall. That's like a 110,000-square-foot big-box store. And I would look at what you might develop today; we don't have anybody approaching us about putting up 110,000 square feet for one individual store,” Kaduce said. “I think the retailers, their concepts have changed. … There's new experiential retailers that are willing to take down parts of those spaces. … So you may not see your physical confines or physical walls change or the actual square footage of an entire mall, but you definitely will see it get chopped up and changed.”