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Beyond the Backlash: Dark Store Theory & the Impact on Commercial Property Investors

If your retail or commercial space is facing challenges when it comes to re-tenanting, one of the newest trends in facilities management is the Dark Store Theory. The concept is taking hold, particularly among big-box retailers, and today we’re talking about the pros and the cons of this idea.

Extra Space Management: Losing Brick and Mortar Ground

Many big-box retailers are closing down. It’s not necessarily a lack of business; it’s simply the gains that e-commerce has made in the last couple of decades. When brands decide to abandon their brick and mortar storefronts, property owners are left wondering how to fill that space. Leaving it empty isn’t a viable option; vacant properties attract decay and deterioration as well as squatters and intruders. In an effort to attract new tenants to those spaces, investors are having to negotiate rents that are extremely reduced. This problem can have a significant impact on ROI.

Dark Store Theory: A New Way to Value Space

Dark Store Theory, or DST, would have property appraisers and tax assessors value a retail property based on its unoccupied value. When a property is unoccupied, it’s dark, and thus not bringing in any earnings. This is contrary to how such properties are currently valued, which is with the assumption that a tenant will be in place, paying market rent. This theory is based on the idea that real estate shouldn’t be valued on its potential to attract income, but on its physical structure and attributes.

What it means for Landlords and Investors and Facilities Management

This is not a proposal that local governments and tax authorities are eager to adopt. Reducing the assessed value of these properties would dramatically decrease the amount of tax revenue they bring in for local cities, towns, and communities. Local governments would need to find a creative way to make up that lost revenue, and it would not be easy.

However, retailers and business owners claim that the current system is not sustainable. They argue that in order to continue providing retail goods as well as jobs for the local economies, they need to operate at lower costs, or risk going out of business.

Retailers and business owners who support DST believe that the value of their real estate is the same whether it’s occupied by a tenant paying market rent, a tenant paying below market rent, or if the property is vacant. Local governments aren’t ready to agree, and in some states and cities, these questions are being argued in court.

We make it a point to stay on top of all the trends and concepts that affect landlords, investors, and property owners. For more information on DST or anything pertaining to property management and facilities management, contact us at Latter & Blum Property Management.