Part II: Project Feasibility – Site Selection
include:
- What is the ingress/egress of the site?
- What are the associated traffic counts related to the site?
- Is the site irregular-shaped?
- Are there utility connections that service the site (gas, water, electric)?
- Is the site located on a highly trafficked corner, or is the site visible from the main corridor?
- What are the local demographics?
- Does the site have good drainage and are the surroundings compatible with the project?
Why are answering these questions amongst others important? As most people know, real estate is driven by three key factors: location, location, and location. As a real estate developer, site selection is neither an art nor a science. Instead, it is a process that involves doing homework to justify making a substantial financial investment in the near future. Site selection is fun. Once a real estate developer is comfortable with the real estate market, he seeks to better understand the particular real estate site. Seeing photographs, aerials, and flyers can only do so much. A developer must physically see the site to get the “lay of the land” and familiarize himself with the surroundings. What may be obvious from a quick drive-by of the site is often overlooked from photos. For example, an excellent retail site located on the corner seems to be a slam dunk location for a Dunkin’ Donuts drive-thru. However, down the block, there is another competitor that has been selling donuts and coffee. Observations that may not be blatantly obvious at first glance, become obvious upon a site visit. I cannot stress the importance of physically visiting, driving, and walking the site.
To further understand the importance of site selection, we will site evaluation from the perspective of i) the Tenant, and ii) the Developer. From the Developer’s perspective, we will understand the importance of site selection from the following perspectives: location, site data, legal, financial, and utilities/infrastructure.
Courtesy of http://www.regencycenters.com/
The Tenant
Delving further, a real estate developer adopts a top-down approach to understand the local conditions that directly impact the site. Likewise, the tenant also has direct site selection requirements. For example, McDonald’s site selection requirements can be found here , Whole Foods requirements can be found here, and Walgreens requirements can be found here. Tenants specify special site requirements (target demographics, building size, visibility, traffic requirements,etc.) Hence, when a real estate developer is in the early stages of looking at a site, the tenant’s requirements should also be taken into consideration. Since tenants are the “lifeblood” of a real estate development project (tenants pay rent), tenants are often major drivers in site selection. Let’s explore further how a project’s feasibility is crucial during the site selection process.To illustrate the importance of site selection, let’s revisit the Pomona, California site that I had referred to during our Market Analysis discussion. For discussion purposes, I have reposted the Pomona site information.
Courtesy: NAI Capital and its affiliated brokers
A real estate developer feels that the corner site would be an excellent retail site. During the early stages, I brainstorm what potential tenants may be interested in a corner site: KFC, Brooks Brothers, Sports Authority, etc. From experience, I know that Brook Brothers and Sports Authority would not be feasible for the corner site. Why? Brooks Brothers often requires a location within a mall while Sports Authority is a Big Box tenant that has substantial building square footage requirements which would not be supported by the site. KFC may be a potential tenant for the site. Let’s look further at what KFC’s requirements are here. The tenant specifies a lot size requirement of 35,000SF, a building area of 2,500-3,500SF, and a highly visible location with minimum traffic counts of 25,000+ ADT. Looking at the NAI Capital flyer, the site seems that it may be a potential site for KFC. Hence, the real estate developer would contact someone at KFC to review the site accordingly.
The Developer
As I mentioned earlier, the tenant’s requirements are not the only driver in the site selection process. The developer must consider other factors when looking at a particular site. Questions and comments that need to be addressed include:- Utilities and infrastructure. Are utilities available to the site (gas, water, electric, sewer)? If utilities are not readily available, would the real estate developer be able to bring utilities to the site? If so, the developer will likely incur increased project costs. If the utility companies are not able to service the site, then the project would not be feasible. Another question that is often asked are do utilities lines run above the project or are there utilities running underground through the middle of the site? The location of utility lines and easements can impact how the property may be developed. For example, it is not ideal to have a building situated above buried underground power lines. If the utility company ever has to replace the utility line, the utility company has the right to remove anything in its path to access its utility line.
- Site Data. What is the ingress/egress of the site? Can potential customers easily enter and exit the site? If there is only a single ingress/egress, the site will not be feasible for a gas station who requires a minimum of two ingress/egress options. Other observations about site data include: topographical features, subsoil conditions, and the visual exposure/frontage of the site along the street. The greater the exposure, the better the site (generally true for retail). What is the shape of the site? If the parcel is irregularly shaped, it may be harder to develop. An irregularly shaped parcel limits the flexibility of how one can situate and configure a building on the site. Secondly, an irregularly shaped parcel often is worth less than a regularly shaped parcel due to the aforementioned comment.
- Location. What is the average daily traffic (ADT) count of the site? In other words, how many cars drive by the site. ADT is a very important consideration when developing retail projects. Is the site located close by to a freeway? Generally, if the site is located near a freeway, it is more accessible to prospective customers justifying higher retail rents due to the convenience and increased traffic counts. If the site is located further from the freeway, the site may justify lower retail rents (generally true but not necessarily depending on the type of project). Is the site accessible by public transportation? What are the nearby land uses (adjacent and beyond?)
The above list is only a sample of the various factors that a developer must taken into consideration when evaluating a site. You thought project feasibility was easy, but there are other factors to consider. There are consultants who can assist the developer in the site selection process. An example site selection checklist is shown below:
Until next time, we will discuss Regulatory considerations that a real estate developer must be cognizant of during the project feasibility phase. Happy reading!
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