Pads and outparcels were once considered the exclusive territory of freestanding restaurants and/or banks, which agreed to height restrictions and “no build” areas dictated by a mall's anchors to avoid potential impact on parking or visibility. That situation is changing dramatically as more national chains focus on pads and outparcel buildings.
Today's typical shopping centers are designed to accommodate smaller pad tenants rather than anchors, and the “multi-tenant” pad building has become the norm. Why? Huge demand and limited availability mean landlords can get high rents.
Advantages to locating on a pad in front of a shopping center include increased exposure and visibility from the road, resulting in better brand recognition and encouraging “impulse” purchases.
The independent parking fields and easy accessibility to these sites also increase the “convenience” factor to the customer. In the past, typically only restaurant chains and banks could afford to pay a premium for this type of real estate as most of the transactions were typically “ground leases.” Developers were hesitant to invest money in constructing restaurant or bank buildings because specific design requirements often made these buildings virtually unleasable to future tenants.
The shift in philosophy is due to several factors. The first is the advent of the “quick-casual” restaurant, a concept that was virtually nonexistent 10 to 15 years ago. This new category fills a niche between fast-food and full-service restaurants by offering a “full-service” product in a “quick-service” environment. Shopping center developers like that because they appeal to a better clientele than the fast-food chains and have lower parking requirement than the full-service restaurants.
These quick-casual chains are a perfect fit for a multi-tenant pad building because they often have a flexible footprint, making it easier to convert to general retail should they vacate. Some of the more aggressive national quick-casual chains that have adopted similar real estate philosophies are Panera Bread, Chipotle, Corner Bakery, Noodles & Company, Pei Wei and Baja Fresh.
But there is a downside associated with the growth of this new category of food tenants: The quick casuals may require less parking in a legal sense but not from a practical standpoint. The parking requirements are much lower for these restaurants. They generally fall in the 3,000- to 4,000-square-foot range compared with 7,000 square feet for a full-service restaurant. But the customer count can be the same at peak times. In essence, the parking ratios may only require 40 parking spaces for a quick-casual restaurant that may have seating for 100 people. Try combining two or three successful food concepts in a 10,000-square-foot pad building, and a developer can virtually ensure a parking nightmare for the remaining tenants in the project.
Another factor contributing to the demand for pad locations has resulted from the general shift to power and lifestyle centers from regional malls. In the past, there was a general consensus among small specialty retailers that they were better off positioning themselves close to the anchor tenants in malls and strip centers. Those locations provided the best opportunity to leverage the increased foot traffic created by these larger boxes. Now, many smaller retailers are finding it more advantageous and more economical to sit in front of a Target, Wal-Mart or Home Depot rather than be tucked away in a secondary mall location.
Retail chains executing this real estate strategy on a national level include The Vitamin Shoppe, Men's Wearhouse and Jared's Jewelers.
They have become leaders in their sectors by bucking the trend of locating within malls, and instead seeking to occupy the premier space on a pad or out-parcel building providing greater exposure. The other obvious benefit is a lower occupancy cost by avoiding the excessive “extra charges” often associated with locating in the regional malls. A variety of other traditional uses also are raising the level of demand for high-profile pad locations. They include the coffeehouses (Starbucks), ice-cream parlors (Cold Stone Creamery) juice bars (Jamba Juice) and, of course, the banks.
This increased level of demand has been great news for landlords and developers but it has negatively affected the expansion program of many national retailers. I have been directing the growth efforts for The Vitamin Shoppe for the past seven years and have seen consistent growth in the competitive landscape for pad buildings. This year we will open about 60 new stores, 30 of which will be located within pad buildings or out-parcels of a shopping center. The increased demand and limited supply have obviously driven up asking rents, now approaching $35 to $40 per square foot in most regional shopping areas. We are seeing even higher numbers within the premier retail markets.
This trend should begin to reverse itself as new developments become “over-built” and “under-parked.” Many new developers are mistakenly enticed by the high rents offered by most food concepts, whose higher margins let them outbid traditional retail concepts. The attraction to short-term profits has altered their better judgment. They don't fully understand the long-term negative impact too many food uses can have on parking and overall traffic flow.
At The Vitamin Shoppe, we are protecting ourselves against such over-development by defining no-build areas in our lease as well as restricting the amount of parking intensive users allowed within the center. At the same time, we have slightly reduced our prototypical footprint to help compensate for the increased occupancy costs the higher rents have created.
In today's retail environment of unprecedented cap rates, most developers unfortunately do not take a long-term approach and do not pay much attention to their tenant mix. These factors can lead to the ultimate success or failure of a shopping center. For now real estate developers will continue to benefit from the bidding wars that often occur for prime pad and out-parcel locations in new and existing projects. But, like most trends in our industry, the overabundance of pad buildings will slowly decrease as traditional retailers and anchor tenants start to shy away from projects that are perceived as “overbuilt” and “underparked.”
Vice president of real estate for The Vitamin Shoppe