Divaris is marketing 17 surplus Hechinger/HQ stores in the East.

 VIRGINIA BEACH, VA: Big boxes mean big profits - or so the retailers that own them hope. If not, and the retailer goes out of business, it leaves behind a big challenge for the disposition of real estate assets.

This is what Divaris Real Estate, Inc. acquired when it was assigned the task of the disposition of 17 big-box stores formerly owned by Hechinger Co., a Largo, Maryland-based chain of home improvement stores that, after a Chapter 11 reorganization, finally closed its doors in 1999. These stores, 14 of which are vacant and three of which are leased, comprise over 1.5 million square feet of indoor and garden center space in a diverse assortment of markets from upstate New York to Alabama.

The scope of these responsibilities requires a substantial team effort in asset, leasing and maintenance management. DRE's task is "to oversee the process of acquiring the interests for disposition, to maximize the value of the properties upon disposition and to maintain them until disposition," according to Sanford M. Cohen, DRE's COO and head of the team handling the disposition of the Hechinger properties.

The properties, whose market value totals approximately $50 million, encompass both freestanding and inline stores ranging from just under 60,000 square feet to over 100,000 square feet of indoor space, plus attached garden centers. Some are in vibrant retail markets, while others are in markets that have stabilized.

First, the properties had to be analyzed, operating budgets established, the physical properties secured and a comprehensive marketing plan developed. The marketing plan involved a combination of traditional methods - the direct mailing of flyers and brochures, and the mining of agent databases for clients that would benefit from these properties - as well as more contemporary forms of marketing, such as a presentation suite to showcase the properties at the 2000 ICSC Las Vegas convention, Internet marketing efforts and a bid program.

DRE's multi-state presence was required to manage and market a portfolio of this breadth. Agents in DRE's offices in Virginia Beach and Richmond, Virginia; metropolitan Washington, D.C.; Charlotte, North Carolina; and Atlanta comprise the team marketing the properties. For those properties in states where DRE does not yet have a physical presence, co-brokers were recruited for local marketing, but management and national marketing efforts were entirely concentrated within DRE's domain.

The results? "We've received offers on many of the properties," says Cohen, who expects the sale of all 17 stores to be completed by the end of 2001.

What's Next for Big Boxes?

Don't be surprised if not every buyer is a traditional big-box retailer. 

Hechinger's bankruptcy and the disposition of its former locations provide a preview into what may be coming for big boxes and the retailers that operate them.

Hechinger expanded from a Washington, D.C., metropolitan area chain of hardware stores into the nation's third-largest group of home improvement centers. This was accomplished by purchasing Home Quarters, a Virginia Beach-based chain that was one of the first large-format, warehouse-style home centers. Hechinger also merged with Builders Square, another large format chain, formerly owned by Kmart. 

Over-expansion and the movement of the larger and more modern The Home Depot and Lowe's Home Improvement Warehouse outlets into Hechinger's core markets doomed the company. These factors are not unique to home improvement stores, however. Big-box retailers in most categories face challenges similar to those faced by Hechinger's executives in the early 1990s, and like Hechinger, not all of those companies will survive.

"I think there will be shakeouts like this in the future," Cohen says, looking at overcrowded retailing categories and the competition building as e-commerce expands. Big boxes "are here to stay; however, the players that you see today are not necessarily the players that you'll see 10 years from now," Cohen adds.

"It's not our intent to subdivide these into three or four smaller boxes," Cohen says of the Hechinger portfolio, but non-traditional uses of big-box space will be part of the future retail real estate scene. Cohen foresees users as diverse as entertainment venues, back-office operations, educational facilities, light assembly plants, and self-storage operations making use of the large and open floorplans of big box structures, as well as traditional retailers. Divaris Real Estate has been at the forefront of the repositioning process. It has successfully converted big boxes, strip shopping centers and even regional malls into non-retail facilities.

The big box is maturing and changing, but it is by no means obsolete. Adaptive reuse will change the nature of reatail, but as Cohen says, "there always will be a demand for well-located retail in economically growing areas." And as few foresaw the growth of big-box retailers in traditional categories such as home improvements and electronics, so nobody knows what the creative retailing concepts of tomorrow will be. However, Divaris' creativity and flexibility will ensure that the company will continue to be national leaders in the field of surplus disposition and repositioning strategies.