Do you remember when you drove along the popular commercial real estate strips in your area and saw acres and acres of parking lots? The large malls and major retailers like Walmart, Target, JCPenney’s, and Sears had more parking than was necessary. You could see the buildings from far away. Now, you are likely to have your view obscured by a drive-thru smoothie operation, GameStop, or mobile phone operation. These are called real estate retail pad sites.
A commercial pad site exists on the perimeter of larger shopping center parking lots. Some brilliant people came up with the idea to create density within this large commercial parcel situation. In the past, pad sites were viewed as “leftovers” or “fringe” parts of a larger commercial property. Vacant land near the road is no longer the case. This extra land is now used to boost overall profitability while meeting the space demands of local retailers at the same time.
Businesses that increasingly pursue these sites include small drive-thru restaurants, casual dining, or banks. Mobile phone outlets, jewelry, and drug stores are examples of retail tenants that occupy this type of pad site. You might notice that it is harder to see the anchor businesses from the street. You might to look between these multi tenant pad sites to see the stores you remember. Fast food restaurants and convenience stores are popular pad site tenants.
The commercial pad site definition states that they are out parcels freestanding parcels of commercial real estate in front of a larger anchor tenant. The anchor tenant is typically a shopping center or strip mall.
The rise in popularity of commercial pad sites is because they solve problems and benefit smaller retail businesses and larger property owners. Challenges also exist in these situations.
Solutions & Benefits
Smaller retail sites enjoy the following benefits:
- Exposure is needed to grow their business. Pad sites use a ground lease near the perimeter of larger commercial locations allowing more space for future businesses.
- Strip malls or larger mall-type leases restrict the available square footage of businesses, and the anchor tenant’s parking lot creates the required retail space. Drive-thru business successfully operates on pad sites. Businesses sometimes prefer being separated from the larger shopping center.
Benefits for Parcel Owners
Pad sites benefit the property owners of larger commercial parcels get the following benefits from creating pad sites on the existing site. Commercial real estate professionals used creativity to solve problems and add value. Parcel owners enjoy income diversification and increased property value.
- Tenant diversification – adding additional tenants is not expanding the current revenue structure. New pad site tenants are an additional dimension of the revenue structure of a property.
- Customer experience. If tenants relate in some way, customers shop for multiple goods and services in one location. The parcel is more valuable and strengthens all businesses involved. Accessibility was the reason for the malls of the past. Pad sites create a similar concept but allow tenants to create stand-alone buildings with drive-thru opportunities and the square footage they need to operate successfully.
- Increase value – the pad site, or out parcel, will not require any additional land purchase. Adding additional revenue increases the commercial valuation of the parcel. Multi tenant pad sites exist within the existing parcel of the same shopping center.
- Tenant base diversification – more tenants lower the overall risk of the property.
Previously, pad sites implied leftover space with diminished value. Now pad sites, or out parcels, are increasingly valuable for retailers because they give visibility, foot traffic, and the desired size necessary for their operations. Parcel owners can now access national retail operations; they are often called credit tenants.
Challenges in pad sites
Pad sites come with unique characteristics and challenges. They include:
- Local building regulations and zoning – each municipality has its own set of zoning requirements and building regulations. Owners and tenants may need to employ architects for the construction of their location. Architects help conform to construction guidelines and avoid potential fines.
- Visibility and Traffic Count – retailers need traffic for their business models. Business benefits neither the pad site retailer nor the larger parcel owner. Accurately gauging retail traffic is a vital function for pad site retailer success. Visibility is the main benefit of a pad site. Adequate parking must be provided.
- Pad site development can positively or negatively affect the larger business or tenant. The main parcel business is also called inline space. Choose a suitable pad site business for the larger inline space. For example, a small food store would not work next to a larger food store.
- Ground leasing presents the user with a lower upfront cost, but the tenant doesn’t have land collateral to help with collateral for construction financing.
Conclusion:
In conclusion, tenants and owners have forged a solution that creates multiple benefits for commercial real estate use. By adding density to existing commercial property sites, pad sites give national and regional retailers excellent visibility, foot traffic, and the flexibility to create structures that suit their business needs. Owners add diversity to their revenue and increase the value of their property with increased revenue and customer desirability because of complementary goods and services.
