Big boxes at a crossroads

When two Kmart stores were slated to close in New Hope and White Bear Lake late last year, each city took to the news with decidedly different strategies.

New Hope charged headlong into the commercial development game for the barren retail site. White Bear Lake prefers to let the market do its bidding with its now-shuttered Kmart property.

Both stores were built in the early 1970s, and they fiercely competed against homegrown competitor, Target. They both sprouted in growing suburban territories that stretched beyond the metro area's traditional urban boundaries. And, in the end, the real estate was owned by separate out-of-town entities faced with the challenging prospect of repurposing an aging retail store as their Blue Light Specials forever dimmed.

The Great Recession hurt commercial real estate generally, but it dealt a much more severe blow to big-box retailers such as Kmart and Best Buy, which experts say were already vulnerable to a general shift toward online shopping and more competition from major retailers. A recent study by Colliers International, one of the world's leading commercial real estate companies, determined that roughly 120 million square feet of big-box retail space has been vacated since January 2008 -- a space equivalent to 29 Mall of Americas.

Best Buy has already said it will shutter 50 underperforming stores nationwide, including five in Minnesota. And Kmart's parent company, Sears Holding Corp., announced in December that poor sales would force the closing of four Kmarts in Minnesota this year and more than 100 Kmart and Sears stores nationwide.

"Many [chains] just expanded too fast," said Maureen McAvey, a retail expert at the Urban Land Institute. "The outer suburbs are not growing as fast. And there is a desire to be close to an urban area."

As big-box retailers close stores in a down economy, municipalities and property owners alike are often stuck with a big box that needs to be filled. In some cases, the stores remain empty for years.

In White Bear Lake, the shuttered Kmart store's fate is unclear -- its New York-based property owner recently listed the site for lease. "There could be multiple uses for the site," said Henry Cohen, managing partner of Shidler/West Finance Partners V, the property's owner for the past 20 years. That includes retail, office, a hotel or a corporate headquarters, he said. The location, at 3201 White Bear Av. N., just north of Interstate 694, "is very visible and has great access," Cohen said.

Purchasing the 12.5-acre property with a 120,000-square-foot store was not an option White Bear Lake officials considered, said Anne Kane, the city's community development director. The city's last foray into commercial real estate involved purchasing the former Johnson Boat Works lakeshore property in 1999 -- a site that's only now being developed. While the city will help prospective developers with the abandoned Kmart site, "it's pretty much up to the private sector now," she said.

Cathy Bennett of the Urban Land Institute-Minnesota said it's not unusual for cities to purchase private property in a down economy for future development, assuming they have the financial wherewithal to do so.

"When the economy was booming, they didn't have to do that," she said. "Now things have changed and it's more difficult for developers to assemble the funds to purchase the site on speculation, they don't have the equity and capital to do that." Typically, municipalities sell the site once developed. "They tend to get uncomfortable to hold it for long periods of time," Bennett said.

Not everyone thinks cities have the chops to be real estate developers. Tom Martin, a senior director of Cushman & Wakefield/NorthMarq, said "it's difficult to do, and it's not a business that cities frequently go into." Developers have access "to the pocketbooks and development expertise, they can identify tenants and determine market demand, and my gut says that bankers would be a little more comfortable with them."

"If you don't own the property, there's not much you can do," she said of development options. "Now we can go to a developer and see what can be done" under current economic circumstances. That will likely involve some type of "high-density" housing, perhaps low-rise apartment buildings, an idea Hemken admits is controversial among some residents. "People need to understand that high density isn't low-income."

New Hope, a northern suburb settled by dissident farmers from Crystal that boomed in the 1960s, has seen its population decline and age since the 1970s. Hemken, a city resident for 38 years, believes apartments would prove a good option for millennials -- young people between the age of 25 and 35. "Years ago, people came to New Hope to buy a house, that was the dream of baby boomers," she said. "Young people today aren't wired that way."

Curtis Jacobsen, the city's community development director, said the Kmart site could be designed as a new city center. "It's incredibly unusual to have 16 acres of land to develop in the middle of a fully developed city," he said.

"Hopkins has done a lot of redevelopment and in St. Louis Park, you have the city involved in Excelsior & Grand [mixed-use retail and apartment complex]," Jacobsen said. "People said to us, 'Why aren't you doing something like that?'"

Demolition of the Kmart store in New Hope is expected by this winter, Hemken said, and some tentative talks have taken place with developers who may serve as prospective partners. "A developer will know what kind of project can get funded. We know what we want, but they can tell us what can be accomplished."