Building small retail shopping center on 0.8 acre land

[Rao Mu]

I'm thinking about developing a small strip center in a 0.8 acre land. The land is flat and square and no issues. Need to demolish two houses. Environmental seems clean. Demographics are excellent for central New Jersey with median income more than 100k and VPD more than 20k. There is a 50k sqft shopping center next door charging around 22-24$ NNN. I'm trying to estimate what is the best use of this piece of land? I'm thinking like 9k sq ft small strip cemter with 36-40 parking. 150$ per sft construction including demolition and buildout. Any thoughts? I'm reverse engineering to find the cost to buy land. A block away I see McDonalds closer to interstate highway. Any other best uses biggerpocketers can think of?

[Jessica Zolotorofe]

A lot of what @Joel Owens said is very valuable, especially about the engineer and architect putting some preliminary plans together. You'll need them for the approvals anyway, so it's never a waste, and fully worth the money. And also making sure you are not looking at listings with asking rents, but to find out actual rents being paid for different types of tenants. Very good advice.

The parts of his comments that I do not necessarily agree with are that "national tenants take awhile to do anything." I work with almost exclusively national and international tenants, and there is no difference other than the franchisee tenant has to get franchise approval. In a small strip center it is highly unlikely anyone taking 1500-2500sf is signing a lease now before you even have approvals. It could be a year or 2 easy before there is a building there ready for a tenant to take occupancy. Actually, national tenants are probably more likely to commit to a space in advance of building than a mom and pop.

As for the land itself, the rule of thumb for parking is typically 4-5 spaces per 1000sf (you can check the zoning requirements for your location for the exact number), and then typically something like 5,000sf building per half acre, so if you are going to try to get a single tenant with a drive through, you’re talking about probably a max of 2,500sf building when you factor in ingress and egress, landscaping and setback requirements, parking, etc. So you’re looking more toward the Starbucks or maybe a bank if you want to do single tenant. A tenant like McDonalds typically looks for an acre to an acre and a quarter with a 4,000-4,5000sf building, so this property is probably too tight.

If you do go with the strip center, any tenant will likely want you to build to suit, or offer some tenant improvement allowance, which is why I always suggest you don't completely finish the space. Some tenants have prototypes that they need to match, so they need to run wiring or plumbing or have shelving in certain areas, certain flooring or ceiling, etc. so vanilla box is the farthest I would go, but even interior walls might be smart to keep on hold until you know the size units the tenants you can get will want. For a strip center, though, all of this is a ways down the line.

As far as mom and pop tenants, I would be shocked if anyone is signing now and waiting 2 years to take a space, so I wouldn’t depend on that. And even when they do commit to a lease, their guaranties are worth far less than any national tenant and especially being next to a center with big names like Verizon and Dunkin, if you want prestige for your center, you want in some big names, too. You're also far more secure with those types of tenants that have proven track records, do studies to ensure the site is conducive to their business, and you often have a corporate or a franchisor backing up the lease.

Also, a lot of the large retail tenants love when competitors are nearby. So, even with a Dunkin next door, a coffee tenant could still be interested, don't let that deter you. Same with Verizon, a TMobile or AT&T might actually find the proximity appealing. With an apartment building next door, you have another attraction for tenants.

Unfortunately, a lot of this is really just a rolling of the dice. You can get an idea of what types of tenants you can possibly get, but getting firm commitments right now will be tough, if possible at all.

My best advice at this point is to try to speak to the town in advance of spending any money and feel them out as far as what they would allow and even encourage as far as development in that area. Another thought is to check online and see if you can find footprints and/or spec requirements for some different types of tenants, like a bank, fast food, etc. and see if you could work within those numbers to get a better idea of what might work there.