Often, when someone owns a large retail shopping center like a mall, there’s ample space to further develop the property. This expansion can gain more revenue and raise the value of the property in the long term. One way to achieve this goal is through the construction of outparcels.
What Is an Outparcel in Commercial Real Estate?
An outparcel, also known as a “pad site,” is a plot of land in a commercial shopping center reserved for the construction of smaller buildings at a later date. These smaller buildings could include businesses like restaurants, pharmacies or other small retail stores.
The outparcel exists in addition to the main development, like a mall, and it is often on the outskirts of the retail property. A few reasons for this separation are that the business might have different operating hours from the larger shopping development, the business might include a drive-thru, or it simply has a higher revenue as a stand-alone building.
How to Develop and Lease an Outparcel
To develop and lease an outparcel, first, it’s important to consider the type of property and the rules that go along with it, said Jared Mann, Director of Strategic Finance at Waterstone Properties.
“Depending on where the outparcel is located, you also need to understand local regulations, easements or other agreements with existing tenants that may place limitations on what can be developed and where,” Mann explained.
Once those technicalities are sorted out and you have a full understanding of zoning permits and regulations and contract agreements with tenants on the main property, you can then begin to work out the terms of the outparcel property with the potential tenant.
Advantages of Outparcels
Building an outparcel on an existing piece of land that you already own is a relatively easy way to add value to your property. Compared to investing in new land, there are several advantages:
No Added Land Costs
For starters, an outparcel doesn’t require you to purchase new land, so you can develop outparcels without adding to your land costs or worrying about long development timelines.
Attractive to National Retailers
Many outparcels are rented out by national retailers, like CVS, McDonald’s, Starbucks and other single tenant properties.
“National retailers love pad sites due to their access, visibility and traffic,” Mann said. “So outparcels can be great ways to attract credit tenants to your center.”
People coming to and from the main shopping center — or just passing by on the road — are likely to visit outparcels, so national retailers like this built-in consumer base.
Increased Profits and Income
An outparcel provides potential for increased profits on your commercial property. Rather than using the space as just a parking lot, landowners can develop a piece of land they already own and then lease the space to increase the income the property provides. While the outparcel is being developed, the landowners are already receiving revenue from the main building or shopping center and working to increase that revenue through the outparcel.
In addition, “national retailers tend to command the lowest cap rates and highest rents for [pad] sites,” said Mann, leading to additional income for the property owners.
National retailers are considered low-risk businesses, according to many independent financial rating industries. Because many outparcels are held by national retailers, there is little risk involved in the rental, and the landlord will be guaranteed rent with these properties.
Increase Property Value
By developing an outparcel property, you will also be increasing the value of your property because now, there are multiple buildings and sources of revenue.
Outparcel Considerations and Limitations
Before building an outparcel property on your existing land, it’s important to take a couple of factors into consideration.
Local zoning regulations could limit what you’re allowed to build on a property. For instance, Mann said, there could be limitations as to where you can position the outparcel within a shopping center. Before taking on any new construction, be sure to check your local zoning laws to learn what you’re allowed to build and where.
Existing Tenant Agreements
It’s also important to take into consideration any existing agreements you have with tenants from the main shopping area. For example, “there may be … an existing tenant with a parking requirement in their lease that limits the size of a potential outparcel,” Mann cautioned.
Make sure to carefully look over the terms of any tenant agreements before beginning construction on an outparcel property, as you don’t want to violate any terms of your contracts.
Expert Tips: Profiting Off Outparcels
Once you’ve done your homework and researched all the zoning laws and tenant agreements in place, an outparcel can be a lucrative source of income.
“Outparcels can be positioned as ground lease opportunities for tenants,” said Mann. “As a developer, this gives you the benefit of additional NOI [net operating income] to your center without taking on the risk of developing the site.”
And of course, renting to a national retailer minimizes your risk.
What Is an Outparcel in Real Estate?
An outparcel is a plot of land in a commercial shopping center reserved for the construction of smaller buildings.
What Does ‘Pad Ready’ Mean?
Pad ready, said Mann, “essentially means that the land is ready to be built.” So the area is properly zoned, utilities are accounted for, and legal approvals are already in place.
What Are Common Uses for Outparcels?
Outparcels are usually rented to national retailers like restaurants, fast-food chains, coffee shops, pharmacies or other stand-alone businesses.
Building an Outparcel Can Increase Your Profits
If you own a large commercial shopping center, an outparcel is a good way to increase your net income with minimal risk. Rather than buying new land, you can simply develop a pad site on a piece of property you already own, renting it out to a national retailer with guaranteed income. Of course, it’s important to do your research before building, and make sure you’re aware of any local zoning regulations, as well as agreements with existing tenants.