In recent years, retailers have begun to convert unused space in their stores, including the sales floor area, to warehouse and distribution operations for online orders as e-commerce has increased. This trend has accelerated in response to the surge of home deliveries during the COVID-19 pandemic, and many retailers are utilizing even more floor area, and sometimes entire stores, as fulfillment centers. Re-purposing vacant or unused space can aid brick and mortar retailers in competing with pure-play online merchants and help property owners prevent lease defaults and maintain healthy occupancy levels. Municipalities also benefit when the rent roll of a commercial tax ratable of any kind, especially a shopping center, is stabilized. However, retailers and their landlords need to proceed carefully because converting unused retail space to “dark stores” for warehouse and distribution could have land use implications.*
Converting retail space to warehouse and distribution use — beyond the ordinary stock room operation and especially if it includes a shipping component — could be considered a change of the use, even if the warehouse and distribution operation pertains to the fulfillment of online orders for the same retailer that operates a store in the space and takes up only a small percentage of the premises. Most municipal land use and zoning ordinances are reactive, rather than proactive, and likely do not define retail use to definitively include warehouse and distribution for online orders. Even if the warehouse and distribution use were considered an accessory use to the retail store, as that use encompasses more floor area, at a certain point it could be considered a separate principal use—which may not be a permitted principal use in the zone in which the store is located.
Changing the use of a property typically requires obtaining an amended site plan approval, and if the use is not permitted in the zone in which the space is located, a use variance or rezoning will also be required. The conditions and justifications for variances that were previously granted to the property could change, and new variances might be required. The requirement of an amended site plan approval stems from the fact that when the use of a property changes, the underlying assumptions and testimony from the original site plan approval likewise change.
In particular, the parking demand and traffic generation for dark stores are different than for traditional retail use. While the property may have fewer customers coming to the store than if the entire space was used for retail use, the use may require additional employees for the warehouse and distribution portion. Further, dark stores will generate more truck traffic, possibly for both box trucks and tractor trailers, depending on the use and the type of product. The converted use may also generate the need for new or additional off-site traffic improvements to accommodate the increase in truck traffic.
Each municipality’s administrative officer will have to decide whether converting retail space to warehouse and distribution use constitutes a use change, and if so, whether this change requires an amended site plan approval, use variance or rezoning, or other variances, or whether this change can be approved administratively. Any retailer that converts unused space to warehouse and distribution use without first confirming with the municipality’s administrative officer that the conversion does not need an amended site plan approval or other relief risks violating its original approval, which could result in fines or even the business being shut down until an amended approval is obtained.
When municipal officials review their land use and zoning ordinances, they should analyze how to address this trend, possibly by permitting a certain percentage of retail use to be warehouse and distribution. Municipalities will need to balance their desire to have retail areas be active, “real” stores, particularly in malls or downtown areas, with their desire to maintain or increase tax revenue and avoid vacant space. Going forward, retailers and their landlords should consider proactively applying to the local land use boards for permission to dedicate a certain amount of space to warehouse and distribution operations for online orders, in which case they should put on proofs for the site plan that contemplate and authorize such use if the space is converted.
* There are also lease implications of converting retail space to “dark stores” which are discussed in a companion blog post by the author’s law firm colleague Ted Zangari.