Big Box Store

Big-Box Stores: If You Build Them, Buyers Won’t Come

Update: Robert Hill wins for Menards.

“Big-box stores” have proven to be a very difficult valuation problem for many assessors over the past five years, as the temptation to assess them at estimated market values in line with smaller, income producing retail stores (or multi-tenant shopping centers), is often too great to pass up. The problem with this approach is that, unlike other types of retail properties, big box stores are not built to be income-producing real estate, and suffer from various forms of functional and economic obsolescence, practically from the moment the lights are turned on and the store opened.

Some general merchandisers, such as Menards and Mills Fleet Farm, have been in the big box retail market for a long time, and have experienced this market-based truth each time they decide to close a store and put it up for sale. Others, such as Target, Home Depot, Lowe’s, Wal-Mart, Costco, Office Depot, and Best Buy, are just beginning to experience this market-driven reality as they begin to close big box stores in favor of moving to smaller, more intimate spaces to attract customers whose tastes and standards are changing rapidly.

All of these national retailers have long understood that, at least originally, customers liked the idea of purchasing their building supplies, dry goods, home furnishings, and, in some cases, groceries, under one roof. Some, such as Best Buy, decided to offer a deep selection in a single category of merchandise. Either way, the convenience, accompanied by the lower retail prices the bulk warehouse-style sales concept afforded, caused consumers to abandon local retailers in favor of big box stores.

This trend dominated the retail landscape nation-wide for the better part of two decades. Then came the Great Recession, and perhaps more importantly, the convenience and affordability of switching to “on-line” shopping.

As consumer trends continued to evolve away from “one-stop shopping,” so too did the demand for big box stores. Consequently, these stores began closing at a rapid rate, and their “functional inutility” in the retail marketplace led to diminished pricing for the resale of the real estate itself: a seminal fact some assessors have been slow to acknowledge.

Moreover, reconfiguring these buildings for multi-tenant use is very costly, due to the need to redistribute central electrical and heating controls, restrooms, entryways, security systems, etc. This high cost of retrofit has left these properties with very few options in a resale scenario. They are not built to sell for continued use as retail centers, since they have no potential to become income-producing retail properties, and often are not in prime locations for an alternative highest & best use, such as distribution warehouse space.

Rather, they were built to generate an income stream by an AAA credit tenant. Hence, when they do sell, the sales prices invariably reflect a tremendous discount off of actual construction costs, which has been demonstrated multiple times in recent years through the fee simple sales of more than 50 Target, Lowe’s, Wal-Mart, Costco, Home Depot, and Menards stores, in locations nation-wide.

Given that the vast majority of these sales range from $20.00 to $25.00/sf., property tax practitioners are well-advised to alert their clients to the necessity of ensuring that the assessed value(s) of their clients’ big box stores must begin to reflect each of these market realities.

If you or your clients need help in this regard, please check out my website at www.Roberthilllaw.com, where you will find a recent authoritative article that addresses how to appraise big box stores in light of recent market trends, case law from states such as Michigan and Indiana where the issues associated with big box store functional and economic obsolescence already have been successfully litigated to reflect actual unit pricing for this property type, and perhaps most importantly, verified sales data illustrating why the Field of Dreams’ adage, “If you build it, they will come,” does not seem to apply to sales of big box stores; at least not if the smaller and more personal retail trends continue into the future.

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