Understanding Commercial Real Estate Pad Sites

Updated on July 30, 2020

Business owners looking for a new location sometimes find that the retail space in strip malls or shopping malls isn’t a good fit for the needs of the company. As a result, commercial real estate pad sites can be an effective solution to allow business owners the opportunity to choose a different size or style of the building.

In the past, pad sites were viewed as “leftovers” or “fringe” parts of a larger commercial property. But this view has changed in recent years due to the lucrative investment opportunities available in commercial real estate development. This extra land can be used to boost overall profitability while meeting the needs of local retailers at the same time.

What are Commercial Real Estate Pad Sites?

The term “pad site” refers to an out-parcel building lot that is in close proximity to a commercial building. For example, the pad site is often adjacent or even within the property lines of the commercial real estate building. This separate building is located in the same area, allowing the business owner to be connected with the larger shopping center, without the need to be located within the main building.

For example, think about standalone business buildings designed for fast food restaurants or banks. These free-standing buildings are located in a group with a larger shopping center or strip mall. The parking lots for these free-standing buildings would be classified as commercial real estate pad sites.

Why Do We Like These Deals?

What is the advantage of working a pad site deal? At First National Realty Partners, we are always looking for ways to maximize the available return on investment. As we are evaluating retail value-add options, a pad site deal might be considered.

There are many reasons why business tenants are looking for pad site options. The location is at the front of the shopping center and often near the street, making the building visible to people driving by on the street. These buildings are also easily available when shoppers are pulling into the parking lot to visit the main strip mall.

While the standalone building is in close proximity to the bigger shopping area, business owners like the fact that a pad site provides a sole-focus for the building. Businesses can set up their retail location without other distractions of having multiple retail stores in the same building.

Plus, businesses can choose unique offerings that are difficult to add to strip malls or shopping malls. For example, businesses can offer drive-thru services, such as the drive-up access you would see at a fast-food restaurant, pharmacy, coffee shop, gas station, or bank. There may also be a play for an office space that works inside of the merchandising mix. 

Here are a few reasons we like commercial real estate pad site deals:

  1. Profitability: When it comes to pad site investments, it is easy to make the numbers work. When you already own the land, it’s simple to develop the property. Basically, the building is developed with a no-cost basis. Then, ground lease or build to suit deals can be found that make sense economically. It all comes down to the numbers, and we make sure these numbers work for our investors.
  2. National Retailers: It is common for national chains to use these pad sites. National retailers are credit tenants, which means you can expect low cap rates. Plus, a global buyers pool of investors is available for people looking for income opportunities through purchasing single-tenant assets.
  3. Minimize Project Risk: When you are working on the development deal for the pad, you can still pull income from the larger strip center. Profit is available from the main strip mall, giving you options to reinvest in the smaller standalone buildings planned in the parking lot. This strategy helps to reduce the risk of the project.
  4. Increasing Value: Bringing more businesses to your site helps to boost foot traffic and new tenants. As a result, the overall value of the real estate goes up. Adding more square feet to a property increases the NOI opportunity at that property. When you look at the projections, it is easy to see how this process is a strong business practice.

Investment Considerations for Pad Sites

Pad sites can be purchased or leased by the business owner, and there are pros and cons to both investment options. If you are considering a pad site investment, these are some of the factors that will contribute to the success of the investment:

  • Traffic Count, Visibility, and Accessibility: How many people will see the building? Is there a large enough demand in the area to support the business? These questions need to be evaluated based on the needs of each company.
  • Anchor Stores: Even though the main shopping mall is separate from the pad site, the anchor stores can impact the traffic through the shopping center. Many business owners consider the anchor stores and the proximity of the site to these stores. It is good for pad site businesses to be targeting the same type of customers that will be coming in to visit the anchor stores.
  • Local Regulations: Additional local factors need to be evaluated, such as the municipal regulations affecting the construction of the standalone building. The architectural designs, height, and size need to fit the regulations.

In any case, it is always best to work closely with an experienced commercial real estate investing team to evaluate building expenses, other upfront costs and the long-term potential of the opportunity for sale. This expertise can be invaluable to help with the profitability of your business and investment ventures.

Commercial Real Estate Investing Options

Is it a good idea for you to invest in commercial real estate pad sites? There are many ways your commercial investment can be structured, which is why it is always smart to work with an experienced team. Make sure to do your research first so that you choose an investing team you can trust. A good reputation is essential when you are putting your money into an investment.

At First National Realty Partners, we can help you design the commercial investing portfolio that balances potential profits while minimizing investment risks. Our goal is to make it possible for investors like you to get started in these real estate investing opportunities. Contact us any time to learn more about the services that are offered.

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