Pick Up Stix, a San Clemente,CA based chain of fast casual Asian restaurants, has shuttered 26 stores in Northern California, Nevada, and Arizona as of January 15, 2008. Apparently there was no notice given to the local employees, according to the buzz on Elk Grove, CA based Elk Grove Online (requires registration).

Higher Sales Volume and Costs Justify Higher Rent for a Freestanding Drive-Thru As Opposed to a Strip Center Endcap or Inline Shop Space–But How Much Higher?

From Lyle in Illinois

Q :We are looking to open our first fast food franchise location. We have found a location which is an ex-fast food location with existing drive through and the building size also fits what we need.
The location is in anchored strip mall with a grocery store and a few other brands. Asking price for the inline strip shops is $24-$25 psf (NNN) per year, but the freestanding building landlord is asking about $50 psf for the 2,400 SF building. My questions are:
1. Does this make sense?
2. What can we do to bring the rent down?
3. How can we estimate sales from the demographics or traffic count?
4. Any other ideas?

A: This is a great question,Lyle, and involves some time and basic math. Let’s get into it.

Let’s assume for now that the landlord is firm, and we’re working to determine sustainable occupancy cost for your fast food franchise. Here are some factors:

1. Replacement Cost for a Fast Food Drive-Thru

2,400 SF of building will need about 24,000 SF of land to self-park and meet code which is probably about 1 space for every 3 seats. You didn’t say if it was a hard corner (on the intersection, no setback), so let’s assume it’s an outparcel in the center, and for a small piece we will give the land a value of $14 psf, or about $336,000.

The construction cost for strip mall with a basic interior finish runs about $125 psf (I’m guessing again, it’s more in California, what isn’t ) , and as we have a very small building we’ll say $200 psf, or about $480,000 to reach the same level as a strip mall buildout. BUT, I’m going to add $100 psf Lyle, because you probably have a 400 amp panel, floor drains, lots of plumbing and wiring, fixtures, etc. That’s another $240,000 and that includes permits and fees. So far…

Land: $336,000
Building: $$480,000
Extra Restaurant Improvements: $240,00
Total Estimate Drive Thru Building Replacement Cost: $1,050,000+/-

Landlord ROI= 10%=$105,000 per annum= $43.75 psf. So, we’re close, Lyle, depending on the condition and age. We’re on the edge but not off the radar from the cost approach.

2. Calculating Break Even Rent with the Market Approach

I’d like to see you pay no more than 10% of gross sales in rent for a freestanding drive-thru in the suburbs. Your retail shopping center lease form probably calls for percentage rent of 6%-7% of gross as we discussed this <a href=”http://localcenters.com/retailing/featured-5/”> article on estimating sustainable rent</a>, but while we talked about in our article about how to estimate sustainable rents, 12% for a sit down restaurant, your margins are thinner and a10% rent factor on stabilized volume is where you need to be.

$50sf rent x 2,400 SF= $120,000 annual rent/.10= $1,200,000 annual sales volume. That’s $100,000 per month, $25,000 per week and $500 psf in sales volume.

Here’s where your franchisor needs to help you. That’s a lot of volume for a Starbucks, low for McDonald’s, about right for a Church’s, on the low side for Chick-Fil-A and the list goes on BUT, other than Starbucks those stores are about double the size of yours.

I don’t like it, Lyle, this is why we fix a rent point first and work backwards. What 2,400 SF operation could do that volume? Why did the past tenant leave? I’m feeling like the deal-killing attorney here

I think your question is answered, if my estimate from 2,000 miles away without knowing your specifics are even close to being accurate, I think you need to meet with the landlord, tell him it’s a great location and he’s the greatest guy in the mid-west, but the numbers don’t fly, and could he help you understand how you can make money here??

I am visualizing a B to B+ location, not on a hard corner, dark store, and am estimating volume at $750,000 a year. Sounds like a $33 deal to me. Let us know how you deal works out, Lyle! ~LC

Strip Malls Soon To Get A New Player with Marketside

Today Wal-Mart announced plans to roll out “Marketside,” a concept intended to compete head on with the UK Giant Tesco, doing business in the U.S as Fresh and Easy.

The story is still developing, and the figures in the Forbes article below are incorrect. They state that the Marketside stores will be “a tenth the size of Wal-Mart’s 200,000 SF stores, even “smaller than Fresh and Easy stores that are 10,000 SF.”

First, Fresh and Easy stores in the U.S and 14,000 square foot, not 10,000 square feet, and clearly 20,000 is larger than 10,000 so we do not have the full store, which certainly is characteristic of the cloak of secrecy typical of Wal-Mart. No geo-targeting has been released from the giant discounter.

Strip malls are entering a new paradigm with the densification of the suburbs, and Marketside provides yet another fine mini-anchor for strip mall developers. A possible downside could be Wal-Mart’s ability to be a category killer, maybe with any size.

From Forbes

From Dennis in Keene, NH

Q: We have financing and are looking to make profit managing a 6-10 store strip mall. How can we get help in finding anchor stores for our project? thank you…

A. Dennis, if any of us had the definitive answer there would be no one to compete against us, right?

It’s a great question, and I will try to make the response somewhat specific to you and your vicinity. First, you used the word “anchor,” and we typically don’t have anchor tenants in strip malls. An anchor is a larger tenant like a grocery store, a discount box store, or a deparment store that activates the gravity model of a critical mass of on site shoppers. We don’t achieve that critical mass in strip malls, and as such we have to cater to the convenience tenants who are often essential services, not luxury or discretionary-based shopping goods.

In your case, your town is about 25,000 which is a small market but viable. In addition, I see arterials meeting in Keene from every direction, so your trade area is expanded, and that’s always a good thing!

Tenants come to you usually in one of five ways:

• Sign call
• Broker
• Referral
• Walk and Talk
• Direct Marketing

Signing: Brokers may tell you of their intense marketing plans, and if they do it that’s great. The fact remains that your prospects are usually not obvious, and about 65% will initially inquire from a leasing sign on site. That sign should look good, and the biggest line on it should be the contact phone number. And I mean BIG.

Broker/Agent: It’s unlikely there are any large firms in the vicinity like CBRE or Grubb and Ellis, so if you go with a listing leasing agent, and in your case as you’re not experienced I would, you will have to select an experienced commercial agent, not a house broker. They not only need to know WHO to talk to, but HOW to talk to them.

Referral: You seemed like a nice, talkative guy in your email, and as long as you’ve been in your particular business, I’ll bet you’ve met most people in Keene! Pick out some key local business people, get a good looking plan and duplicate it, and show it to them. Ask them if they have any ideas of someone who could benefit from that location. They will talk it up, I promise. Be sure to “remember them” with a nice bottle of wine or even a check if they have an idea that works out for you.

Walk and Talk: The difference between Referral and Walk and Talk is that you pick the prospects and go talk to them. If you’re not a salesman this can be intimidating, but once you make your third call you’ll get in the rhythm and will probably enjoy it.

One of the most exciting things about strip mall leasing is that everyone loves to talk about shopping and retailers. Even after 30 years in the business and owning a number of strip malls, I still “cold call” because there is an exponential progression of local knowledge to be gained by doing so. Don’t assume that the person you call on must say yes; but expect many to be your referrers to real prospects!

Direct Marketing: It used to be mailing to a prospect list, but we use email now. It’s effective if you think out the right prospect categories, and you can find most business emails on the internet. While we’re very careful about spamming the general public, most businesses are pleased that you thought of them, and they like to know about new projects too.

Hope this helps, Dennis. We will be publishing several articles in much more detail about each of these methods soon. Thanks for writing, and good luck being a developer!

John

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Some of our merchants are membership-based and funds are either withdrawn from checking or a credit card automatically.

This afternoon I received a call from one of my best tenants, requesting a split rent payment schedule in January; the reason for his request is pretty clear with the headline above. Thinking there was a processing error, he called the company who processes the payments, only to find that they’ve been flooded with similar calls since January 1 from all over the nation.

Obviously the payors are contractually obligated to make good their commitment, however this is an alarming percentage of defaults.

While the major credit card issuers’ mid-December estimate of a 4% default rate falls far short of the reported 30% declines which could be simply over-limit in some cases, it’s still up 26% from the previous period according to a recent CNN Money article. We’re all familiar with home equity defaults and foreclosures; so what’s next? Auto loans, and debt on those toys like Waverunners is my best guess.

What do you think?

Oh, and of course I agreed to half the January rent now and half on the 15th. When you’ve got a great tenant who has a plan and gets blindsided you go to the wall for them.

Behavioral Patterns of Winning Tenants and Great Landlords

Part Two of a Multi-Part Series

In our first article in the series,

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Brad Edmonds, author of There’s a Government in Your Soup, speaks of the history and social fabric of the ubiquitous strip mall. It’s a good read!

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