Restaurants battle growing number of competitors for pad sites
‘We’re all growing, and we are all competing for that same parcel,’ explains a Checkers/Rally’s exec when describing the fierce competition for sites in front of shopping centers and grocery stores.
Restaurants scouring the market for pad site locations are finding an inventory that has been picked over.
Pad sites are a favored location for Checkers stores, with a smaller footprint than most.
“The competition for premium pad sites is fierce,” says Lew Kornberg, executive vice president, national lead for retail tenant representation in the Chicago office of JLL. Pad sites are those outlots that sit in front of shopping centers and grocery stores.
“There is definitely an increase in demand with less inventory out there,” says Dave O’Brien, senior real estate manager at Culver’s in Prairie du Sac, Wisconsin. Culver’s has been searching for one-acre pad sites to support its freestanding locations. In fact, one-third of the locations the company has opened in the last couple of years have been on pad sites.
Culver’s has continued to expand throughout the recession. Franchisees added 28 new stores last year with another 35 units expected to open in 2014. Other competitors also are ramping up their expansion plans. “We’re running into cases where there are multiple offers on sites, and either we’re beating out other folks on sites or vice versa,” says O’Brien.
It’s classic supply and demand economics. “With scarcity of supply you have the force of higher prices at play, which eliminates certain users,” says Kornberg.
Competition has picked up in the past 18 months for prime pad site locations. “Real estate is not getting cheaper and there is absolutely an increase in demand. We’re all growing, and to a certain extent, we are all competing for that same parcel,” says Jennifer Durham, vice president of franchise development for Tampa-based Checkers and Rally’s Restaurants. The company is vying with its restaurant peers for those sites, and depending on the size of the site, they also may compete head-to-head against other uses such as auto service centers and banks.
In addition, non-traditional retailers have thrown their hats in the ring. Medical uses such as clinics, dentists and chiropractors are now pursuing retail pad sites, because they are trying to provide more convenient locations for their customers.
Sometimes the added competition means walking away from a particular location when pricing gets pushed too high. For example, Checkers and Rally’s has an existing franchisee who is looking for sites east of Tampa where there is some new development occurring. “What we are seeing is that the pricing there is just prohibitively expensive, upwards of $1 million for the property itself,” says Durham.
Even if the franchisee were to rent rather than purchase the property, rents in the area would be anywhere from $90,000 per year and up. Checkers and Rally’s average unit volumes are shy of $1 million per year. So, the economics of such a deal would be very challenging. The company prefers sites that are priced at $500,000 or where rents range from $50,000 to $70,000 per year.
Pad sites are still available, although franchise groups are often working harder to find them. One of the opportunities to grab pad sites has come through store closings. Blockbuster Video, for example, has closed all of its nearly 300 stores in recent years, which in turn allowed some new users to snap up their real estate. Many of those stores were in single-use or small multi-use outlot retail buildings.
Retailers such as Home Depot and Lowe’s have carved out and sold pad sites as a means to raise additional capital. Some retail or restaurant users are going into those locations that might not normally do so, because that’s what is available and they have figured out how to operate effectively there, notes Kornberg. Another source of new inventory in the past few years has been the expansion, renovation and redevelopment of existing malls and shopping centers.
Pad sites are a favored location for Checkers and Rally’s. The franchise opened 36 new locations last year and plans to add between 40 and 50 new restaurants this year. One thing that gives the company an advantage over the competition is its stores can fit on a smaller parcel than many restaurants. The 900-square-foot restaurants do not have dining rooms, which allow the company to locate on sites as small as one-third of an acre. There is far less competition for those smaller sites as most restaurants and other businesses require 0.5 or 1-acre sites.
In fact, Checkers and Rally’s is working on getting permitting for a new location in Delaware that is slightly smaller than one-third of an acre. The company’s new single drive-thru format also allows them to take a narrower site compared to many of its competitors.