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.
You see the slow progression of smaller retail sites on the perimeter of larger commercial 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 also occupy this real estate class. The evidence of the progression is that you could no longer see the larger businesses plainly; you now need to look for the larger business between these pad sites.
The pad site definition states that they are outparcels freestanding parcels of commercial real estate in front of a larger shopping center or strip mall.
The rise in popularity of 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. Using the areas near the perimeter of larger commercial locations allows more space for future businesses.
- Strip malls or larger mall-type leases restrict the available square footage of businesses, while parking lots of larger parcels create the required retail space. Drive-thru business successfully operates on pad sites. Businesses sometimes prefer being separated from larger businesses.
Benefits for Parcel Owners
The owners of larger commercial parcels get the following benefits from creating pad sites on the existing site.
- 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. Imagine the 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 outparcel, will not require any additional land purchase. Adding additional revenue increases the commercial valuation of the parcel.
- 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 outparcels, are increasingly valuable for retailers because they give visibility 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 business 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.
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 tenants excellent visibility 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.