Odd Lots - How Businesses Decide Exactly Where to Set Up Shop

Episode Date: February 5, 2024

We know that companies think carefully about where they open stores. They might look at things like how many people pass by the location on a day-to-day basis or how easy it is to access the site by car. But what are the lesser known factors that go into deciding where to open a brick-and-mortar store? And how have these considerations changed over time? In this episode, we talk about the art of retail site selection. We speak with Tom McGee, CEO of the International Council of Shopping Centers, which annually hosts one of the biggest deal-making events connecting retailers and commercial real estate owners. Then, we drill down into a specific type of business: drive-thrus for coffee chains and fast food restaurants. We speak with Chris Hatch, partner at Forza Development.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, Odd Thoughts on Amazon Music. Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, do you remember our conversation with Ali Webb, the founder of Dry Bar? Yes, that was a really great conversation. And, you know, we talked a little bit about how she selected optimal drybar locations. I think both of us. our interest were piqued at that exact moment about the art of location selection. Yeah, it was sort of a light bulb moment for me because obviously you think, yes, if you're a business, you're putting a lot of thought into where you're opening up a store. And presumably you want to find a location with lots of traffic and try to sell as much as you possibly can. But there are all these new and intriguing factors that were sort of lurking behind the scenes. So I remember

Ali was talking about how for dry bar, it's really important that you select a location where you can effectively slot into a customer's sort of day-to-day routine, right, next to a grocery store or on the outside of a shopping mall so that there's easy access. But there were also things that I had never considered. Like, if you are in a shopping mall, does the shopping mall owner actually allow more than one hair salon in that space? Speaking of shopping centers, you know, there's this location that I drive sometimes when I'm on the Long Island Expressway that I always pass. And in this like one shopping center that I always see from the highway, there is like a dry bar, a soul cycle, and something else. And I just imagine. That's perfect. Yes, the person, most likely a woman in this case who's like for, yes, this shopping center basically like knocks out three of the things that they have to get taken care of during some like, you know, two.

hour block of free time that they have. Man, that is a, that is a lifestyle. Yes. It's a lifestyle location for sure. But the point is there are all these sort of like hidden things happening behind brick and mortar site location. And I feel like we should get a better sense of them, particularly in the context of what's happening with commercial real estate. We've done a couple episodes on CRE and offices, but also on shopping malls. And again, there are things in the shopping mall world that I have never considered before, such as the maintenance or how important are holiday decorations and how that can feed into values and things. So I'm curious if you're a business, if you're thinking about, well, I want to open a store in this particular strip mall

because they have really nice Christmas decorations or something like that. Totally. Or where in the store or where in the mall or the strip mall, the store physically is, the types of turns that you have to take could matter like all kinds of. of things. It's like, yes, we all know location matters, but it's like they're real professionals and true location optimization. The secret art of choosing shop sites. Yeah. And so we should, I'm eager to learn more. Okay. So this is actually a two-part episode. That means we have two perfect guests for you. To begin with, we're going to be speaking a bit broadly about this whole idea of site location. We are going to talk with Tom McGee. He is the CEO of

of something I didn't know existed, the International Council of Shopping Centers, the I-C-S-C, which is a trade association for shops. We're going to talk to him generally about how businesses choose where to set up shop. But then we have a second guest. We're going to drill down into even more detail, Joe. That's right. After our conversation with Tom, we are speaking with Chris Hatch of Forza Development. His actual real expertise happens to be in dry.

through locations. And so things like Starbucks drive-thrus and in-and-out drive-thrus. And so after our sort of general conversation with Tom, we're going to be speaking with a specialist in one area about how a national chain figures out the optimal spot to put in a drive-through location. All right. Here is our conversation with Tom McGee, the CEO of the International Council of Shopping Centers. Tom, what is the International Council of Shopping Centers? Well, the International Council Shopping Centers, which we go by the term ICSC, is a trade association. We represent about 55,000 members, landlords, owner developers, tenants, service providers, brokers, accountants, attorneys, everyone that serves the retail industry with a particular focus upon

physical retail. So, big picture, some sort of national chain, you know, like a tractor supply or or a Starbucks or, you know, they're like, okay, we want to expand in a new area. What is the process generally by which they'd go out? Do companies have like in-house real estate teams? Is it brokers? Like walk through the process by which a commercial landlord and some sort of retailer will connect to be. Well, you touched upon a couple things, and those are two very different brands. But first, most big national retailers will have an in-house real estate team.

That does not mean that they won't use brokers. for assistance and certainly all national owner developers will have an in-house leasing team, people that work with tenants to help them find space and negotiate terms. But big picture, the CEO will start and say, we have growth objectives. We want to open up a certain number of stores this year

to help meet those objectives and or we have a number of leases that are coming due. And we may want to renew those leases or look for alternative sites. And so what they'll start with is based upon those two broad objectives, say, okay, first of all, who's our core customer? You know, particularly if you're an established retail, you have a pretty good sense to who your core customer is and who you want to serve and who you want to establish. And so demographics, you know, are very, very important. You look at different trade areas and you say, okay, does this particular trade area have the demographics, the type of customer that we're looking to serve?

If you are a tractor supply, you have a certain demographic that's probably interested in the type of products that you serve. If you have a Tiffany's, you have a certain demographics of the type of property, a type of customer that you're trying to serve. And you're looking for those different types of locations or areas that fit your customer needs. And then you start looking at, okay, what other retailers are there? What are the properties that are available that I might want to situate in? And generally, the vast majority of retail in the United States, New York being, you know, an obvious exception where there's a lot of street retail and so forth, are domiciled in shopping centers, whether that's big regional malls or local open-air shopping centers and everything in between. And then they'll start looking at the tipper types of properties that they want to locate their space in and begin to talk to landlords and begin to understand who are the other tenants within, you know, that space, etc. are they may use a broker to help them with that. They may not. A landlord may use a broker

to help them. They may not. The larger they are, generally the more in-house it is, the smaller they are, generally the more they might use the outside service providers. But even large national chains and large national landlords will often use service providers to supplement their team. What kind of due diligence goes into identifying locations? So let's say, I don't know, I have a small business and there's a nice strip mall and there's a vacant space and I think this looks like a really good possibility for us to set up shop. What are the sort of factors or things that we would be looking out for? Like, for instance, would we be standing outside the shop like measuring footfall or something like that? You would certainly stand outside the shopping center and want to observe it and make sure that it's of a stature and a quality that's representative of your brand.

I mean, you start out that big demographics and looking at your customers, but then you start drilling down. And you might have a shopping center on both sides of the street, right? And you might say, well, why do I pick this one versus a different one? And you might do research on social media and see what the local community says. You certainly are going to look at the upkeep of the shopping center. Is it visually appealing? Is it well maintained? Who are the other tenants?

That's a really big deal for retailers, because not only. are they going to want to make sure that there's not, you know, a natural competitor that's in that space that they might cannibalize each other. But you are who the company you keep, right? So you're going to want to make sure that the folks that are in that center are consistent with your brand. You're not going to generally have a Walmart, which is a large mass merchant retailer next to a Ralph Lauren or something like, or Louis Vuitton, which is a high-end luxury. So you want to make sure that there's a consistency to the type of retailer that's in that Well, I was going to say, conversely, from the perspective of the shopping center, how much do they think, like, okay, here's a vape shop, here's a...

Spencer's Gifts. Yeah, you're right. I imagine those must be co-located next to vape shops, if they still exist. Yeah, like, how much do they think about, like, mix optimization? Yeah, you absolutely think about that because, first and foremost, the traffic that's in the shopping center, right, is going to be a lot. be driven by the tenants that are in the shopping center. So you want to have a consistency. That's why you often see certain retailers that are in the same shopping center. You might see, you know, certain discount retailers and certain service providers that are often in the same shopping center,

an Alta and a Target and so forth, because they have a similar type of consumer. So in your example, you probably, if you have a vape shop, you're probably not going to see certain retailers in there, because that's not necessarily consistent with the demographics. that they're looking for. Conversely, the shopping center owner themselves, it's really important to them as well to curate the mix appropriately, right? Because that's going to generate traffic.

If you have a hodgepodge of stuff, you know, mixed in that don't have any synergy, that definitely isn't good for traffic, right? And it's not good for your brand. And ultimately, it's not good for your ability to attract the next retailer and the next retailer because this particular industry, retail real estate,

more than any other form of real estate. It is very relationship-driven, and it's very much people are concerned. For example, in an office, a law firm might be on the fifth floor and a construction company might be on the sixth floor. It doesn't really matter. Right.

But in a shopping center, whether it's a big regional mall or it's a local shopping center, it does matter who's next door to you because there's a synergy and a relationship both from brand identity and also foot traffic that's very, very important. So let's say we've identified a likely location and we're now

negotiating with the landlord about setting up a lease of some sort. What would go into those negotiations and what are the typical sticking points that you observe? Well, the most important one of the most obvious ones, right, term and price. So those are often, quite frankly, the most important, they're in the most important points and often the sticking point, right, the sticking points because both sides have a mutuality of interest to make sure they're being competitive. But outside of that, you're going to look at things like co-tenancy. You know, who else is in the shopping center? And is there somebody that has a clause in there that says you can't have a similar type of apparel retailer?

Could I demand a co-tenancy clause? Like, for my business, could I say I don't want any other competitors in this area if I take up the space? Yeah, you could have co-tenancy clauses as a tenant. And that would be a negotiating point. You're not necessarily going to get it. but you can certainly request it. And your prominence, your leverage is the bigger you are, and the more traffic you're going to drive,

the more leverage you're going to have. And now those kind of tenancy clauses can often get renegotiated. So you have a co-tenancy clause, and the landlord might identify a tenant that they want in that shopping center, and they may go to that other tenant that has a co-tenancy clause and say, hey, we got this great retailer that we want to bring in, or great concept. You have a co-tenancy clause that,

prohibits it, less negotiate. And, you know, that may be a negotiation. They might say, hey, that's great. There might be no consideration that needs to be because they might look at it and say that's going to drive more traffic or they might, there's no financial consideration, you know, or a free rent period or some type of negotiation that might take place to adjust that co-tenancy clause. So drawing down further, you know, we talked to Ali Webb, the founder of Drybar. And the other point that she made that I think was really sort of like hit a lightball. But it's a lot of it. Like you can identify a great region or a great area, a great town or your demographic. You can identify the right shopping center.

But depending on the nature of what you're selling, location in that center is important. So she pointed out that for a blow dry bar where you might want to, you know, tell about the in and out and quick, if you're in a mall, you don't want to be deep in the mall. And that that's problematic. You're not targeting people who plan to spend a lot of time in the mall. You want to be on the perimeter. What are some other, you know, okay, after you identify the shopping center, etc., etc. What are the other types of things that you see retailers thinking about with within space within the air? Well, that's a particularly important one, right? If you were a convenience type of

retailer, you definitely want to be a place that's convenient, right? So you want to make sure you're on the end, you want to make it as easy and frictionless as possible for your customer. Another big one, because of the nature of how a physical retail is used today, which isn't just for traditional shopping. So we all picture that people go into retailers and shop and, you know, why, you know, around the aisles and so forth, which in fact they obviously do a lot of. But think about what happened during COVID. You have this whole convergence between the physical and digital world taking. You have things like curbside pickup and click and collect and so forth. So now the actual parking lot and the flow of traffic is really, really important. If you're

a retailer that really wants to, and this is a whole other topic, but if you're a retailer that really wants to drive as many people as possible to your store, because while you and I all believe, believe it's a constitutional right to get free shipping. That's right. Somebody actually is paying for that, and it's the retailer. And so if they can drive someone to go to their store to pick up that good that they ordered online, that's a big win because they preserve that margin. But you're going to want to make sure that experience is very frictionless.

And so if I'm driving up and I did a click and collect as curbside pickup, well, I want to have the ability to somebody actually put it in my trunk very easy. and I drive away and or I'm going to want to set up the store in such a way if somebody's going to go do a click-a-click and actually walk in the store that they can do that in a very convenient way. So the location matters. It depends upon what your strategy is and how you're going to use that store. On April 4, 2023, around two in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. What happened next turned the story into a political fire. Storm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16.

What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example. Executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your podcasts. Scalable are these types of tenancy agreements.

Like, if I am a national chain, could I strike some sort of deal with a major shopping mall operator or a major landlord of some sort to set up shops in like 10 different states at multiple locations. You could, but it tends to be much more property specific than that, because it goes back to, you know, kind of the basics of location. You really want to think about, you know, the demographics of that area, the community that you're serving and so forth. So, yes, you could strike a large deal like that, but it's generally, particularly on large national retailers who already have an established footprint. They're going to be much more location specific. So the International Council of Shopping Centers, you actually run one of the big deal-making

conferences for this space. We do. It goes back to this industry being very relationship-based, and so we host about 100 different events annually. We have one exceptionally large event, which is in Las Vegas in the third week of May every year. We call it ICSC, Las Vegas. We'll have about 30,000 people come to that event, and they'll have. And they, They come to that event for one reason to do deals. They come to that event. Yes, we have content and a whole bunch of other aspects to it, but the core reason they're there is to network and talk transactions.

So if you're a major or quite frankly even a regional landlord owner developer and you're a national, regional or an emerging retailer that's looking to open up locations, you will very likely go to that event or one of our other hundred events. to build relationships and talk about expansion and talk about locations. And landlords will look at that as an opportunity to both nurture their existing relationships, but also attract those new tenants into their spaces. I know these conferences are really just about meeting people and deals, but I assume. Also being in Las Vegas.

And being in Las Vegas, which is why I would like to come. Well, we'd love to have you. Yeah, we'll come out. But I assume that there's a program and panels and stuff like that. What are going to be the big themes right now? in spring 2024 in terms of location identification. Yeah, I mean, the biggest challenge the industry has right now, and this is going to surprise you, but is really supply.

Oh, of space. Of space. Interesting. And so particularly in suburban real estate is kind of on fire right now, particularly suburban open air. Why? Well, first and foremost, because of think about what happened in the pandemic, so many people move back to the suburbs and they're working from home.

They're not necessarily coming into Midtown Manhattan every day. So they have a lot more time. And so they're using those local retail outlets. Retailers are using their stores for multiple purposes, like fulfilling online orders. And so you see this whole synergy between the physical and digital world. And so while you have this increasing demand for space because of this multiple purposes, you have really had almost no new supply, net new supply. And there's individual markets where there's been obviously.

retail construction. But if you look broadly over the United States, retail sales, since the great financial crisis, have almost doubled. You know, they're 85, 86% increase since that period of time. You know, U.S. GDP has gone up by 30%. Population's gone up by almost 10%. Retail square footage has gone up almost nothing during that period of time. So the industry has kind of done a very good job of growing out of the financial crisis, but has not built a whole lot of new supply. And quite frankly, there's probably not a lot of new supply that's going to be built over the course of the next couple of years. One, it takes a long time. Even if you could start today and say, I'm going to commit to build a whole lot of new retail square footage, it would take a number of years for that

to come on site. And of course, we had, you know, the cost of capital is increased significantly over the course of the last. Once again, we see how higher rates actually impair the supply side, at this case, retail real estate. So supply and demand. So occupancy, and particularly in the open air space, is at historical highs. Vacancies exceptionally low. And when you hear of these, you know, large retailers that have filed for bankruptcy and their closing locations like a bed bath and beyond and so forth, there's typically multiple bidders for that space almost on the day it becomes available because it's well located

and because there's just demand for physical space. And whether it's filled by one retailer or multiple, the owner-developer may, you know, reconfigure the space if they have multiple possible. tenants for it. I feel like we need a moment of silence for bed, bath, and beyond the place where I think probably 80% of people in America have bought like the essentials for their first apartment or house. Tom, you know, you mentioned the space restrictions there. How much of that is the higher cost of funding the PTSD from the pandemic versus people writing off physical retail for years now? I mean, this was a story, even in the early to mid-2010s, the idea that, well, people just aren't going to go to shopping malls.

Everything's going to be superseded by online shopping. Well, the biggest factor in the challenge around supply is just the lack of construction. And the lack of construction really was, you know, I think a byproduct of the great financial crisis, owner developers, you know, being resistant to building. You know, having gone through that, obviously lenders being resisted. to the construction of new retail space during that period of time. So I think the market kind of dictated that we had enough retail square footage and we're not going to build a whole lot more unless you're building new housing developments and so forth than growing parts of the United States.

Obviously, there's been a lot of new retail in Texas and Florida and places where the market's growing. So to that extent, the narrative around the demise of physical retail influenced how much construction there was over the last 15 years. Today, I think if you took... talk to most people in the space and those most people that are investors in the space or possible sources of capital commercial retail real estate is actually a fairly favorite sector right now which is historically where it's always been except for you know the last 15 years ago because

it's emerged from the pandemic in such a strong position it's also on a relative basis to office space right well but there's also other foreign i mean there's logistics and industrial and healthcare i mean there's lots of different types of commercial real estate. So I think it's gone back to a space where people view it in a favored way. It's stable. Statistics and data around it back to the supply and demand are such that it suggests that there's a stability around it. And there's an unlikelyhood that you're going to have a whole bunch of new supply coming on the market anytime soon. So I think most investors look at retail real estate quite favorably right now.

Clearly, there's some challenges in the space. I mean, it depends upon there's, you know, centers that haven't done as well. but that's just competition. And the mall sector, there are exceptionally well-performing malls, particularly in the high-end sector. There are some challenged malls. But, you know, if you look at the mall sector gets such a disproportionate amount of attention. You know, there's over 100,000 shopping centers in the United States.

About 1,000 of them are malls. But because they're so iconic and they take up a lot of square footage, they do get a lot of attention. But all malls aren't created equal. and some are doing exceptionally well, and some are more challenged. Are there cursed locations because you always, you know, you drive through your town and a new restaurant or something is in that. It's like, oh, it's the fifth one in that spot.

And it's just something, you just sort of, this must be a cursed spot. Or even in New York, there's real estate that stays empty for years and you think what's going on there? And like, A, is that a real phenomenon or is that just something we create in our brains? But then the other question is, if I have a store and I'm looking, would I get unnerved? It's like, man, the last five tenants in this location, they each only lasted 18 months. It looks good on paper, but for some reason, whoever occupies this space, like, is that a real phenomenon? And is that something that a prospective tenant would take into account? Well, it's certainly something of prospective tenant should take into account, right?

You should look at, you know, the location and say, what's the history of somebody that's been in that location? And if you have a series of failed tenants in a location, it may be because they had a bad concept. Or it may be the location has something to do with it. So you should clearly look at it. And sometimes it's as simple as is it a right turn or a left turn. You know, what's the traffic flow? And that does matter. Look, time's limited.

They're stressed for time. If you have a young family and you've got to wait five minutes to make a left turn. I drive with my family and that is a big factor. It's like, oh, it's on the other side of the road. Wait, you can only turn left. No, it's just more like you're thinking of it. about where to stop on a drive. And you're like, oh, do I really want to have to do a left turn in or a left turn out? Maybe I'll go to the one where, you know, like, those things matter.

Absolutely. So I do think prospective tenants should look at the history of who's in a space. Generally, if it's a, quote, cursed location, honestly, it has to do more with take a step back and look at that location or that shopping center. It probably is one that either there's a really strong center right next door to it. And that strong center and or the one that's, quote, cursed, just isn't getting the kind of care and attention and investment that is needed. People want to shop someplace where it's clean and it's well kept and it's well maintained. And they want to shop where, quite frankly, while we all don't like crowds, we kind of like crowds. Because if there's a crowd there, that attracts us to go there. There must be something to it.

So often it has to do with investment and just care and feeding of the center. Tom, that was great. Thank you so much. That was fantastic. I gave you what you're looking at. Yeah, that was really fun. That was our conversation with Tom McGee, CEO of the International Council of Shopping Centers. And now let's talk to Chris Hatch of Forza Development on the Art of Drive-Thru Sight Selection.

What does a Forsa development do? We are a retail developer and we're based out of Salt Lake City and we build retail throughout the United States. What kind of retail? Any specific names? Yeah, currently we're doing a lot of work for Dutch bros throughout their expansion going. And then we are also doing some Starbucks, have an in-and-out deal going, jack-in-a-box, etc. So are you like, are you a domain expert for drive-thru type concepts of coffee shops and restaurants? If you really like to nerd out and think through throughput through a drive-thru, then I am your person. Yes.

I have a feeling that Odd Loss listeners are really into the idea. of nerding out on drive-through throughput. Yeah. Wait, so are there specific considerations for drive-thru, though? Because when I think about a Starbucks, I primarily, I mean, this may be an offshoot of living in large cities for a long time, but I primarily think of walking into a Starbucks, ordering my coffee, and then probably not staying there, but walking out. How out-of-touch city dwellers we are that we mostly associate Starbucks with a place you walk into.

But they have both. I mean, even in the suburbs, there's both. So when you're thinking about developing a site, are you thinking specifically about the drive-through potential or about the retail opportunity overall? Yeah, that's an excellent question. I would say either you're out of touch or that's the magic and charm of living in a city life. Might be both. Yeah, right? So as far as a Dutch Bros goes, a Dutch Bros is a 950 square foot building.

The vast majority, in fact, with the exception of only maybe a few units have no interior seating. There's no interior dining. Sometimes they'll have a patio and a walk-up counter is typical for a walk-up pedestrian traffic. However, 95% plus of their drive-through traffic is their customer pattern. What about like for a Starbucks? So you said you've done Starbucks as well. And I know that like their drive-thru pickup, et cetera, I think that's like a booming part of their business overall. But like how do you think about, say, like balancing that?

I was actually just at a Starbucks that had both a drive-thru and a walk-in. So how would a Starbucks or you think about balancing those two different modes? So I'm currently building my ninth and 10th Starbucks that I've developed for them. We have done one of those as a drive-through-only concept, which is sort of similar to that Dutch Bros footprint, about 950 square feet, no interior dining, and has a pedestrian walk-up window. The other nine have all been cafe stores, and the average size on those has been about 2,400 square feet. It typically allows for about 80 customers to sit down inside of the restaurant or Starbucks Cafe. and then the rest of the traffic to go through the drive-through,

I think they're typically experiencing about 50% of their traffic and sales going through the drive-thru. Wow. So massively important for them. Okay, here's another step-back question. What is the allure of the drive-through? I don't get it because I do see,

you know, okay, not in New York. When I'm in Connecticut, there is a local coffee shop that I go to and it has a drive-thru window and there is every morning an incredibly long line. And I will still get out of the car, go into the store,

order the coffee there, take it into the car, and avoid the drive seat. Can I answer this? Yeah. You don't have kids to get out of car seats and buckle them back up. Maybe that's it. And I think, well, I'll let Chris answer, but my first impulse is like, I can tell you exactly why I don't want to get out of a car sometimes. Yeah, you bet. You were asking me about the weather when I sat down, and I was telling you how Salt Lake is in a little bit of a warm front right now, which is high 30s and mid-30s for this time of year.

But imagine, for example, you're my wife, we have five kids, 15 to six years old. And you've got multiple kids buckled into seatbelts and you're running a dance or ice skating or soccer or whatever the current exact activity is at this moment. You're just trying to hydrate yourself and the kids. It is just so much more convenient to go through the drive-through. Now, what's wild about that is if you have the time and energy and desire, it's so much faster, typically, to walk into the restaurant. Right. And especially on these coffee things, the way that most of these retailers have become very smart with tech. And so you can typically make an order in advance.

And it'll be prepared and ready and sitting for you. So you just walk in, grab it, walk out. Buckling and unbuckling car seats in particular is just like one of those things that, like, it's not that hard and it doesn't take time. But there is like this like mental element. It's like, oh, man, who's going to do the buckling in? So I get, it's like, I like don't mind like spending several minutes in the theoretical drive-through to avoid the first. 15 seconds of the unbuckling and buckling process. Let's get into site selection.

So whether it's a Dutch Bros or a Starbucks, you want to find the optimal place for that person to come in, swing their car in, stand the line. What are the first things that a site location must have to make it a plausible drive-through location? You bet. And for this, I might switch brands. Let's flip over to In-N-Out Burger for a moment. So I'm working on my first In-N-Out burger location, and it's actually located

in the city of South Salt Lake City, not Salt Lake City. Now, the reason I bring that up is the very first thing you need to pay attention to when you're selecting a site is you've got a good corner. It's got good presence on the street. It's got excellent ingress, so you can get into the site very easy with a vehicle, which is how most of the traffic is driven to these types of concepts. Then your next step is to determine if it actually is large enough, and if your targeted client can fit and operate and run their mousetrap on the site.

And then the second part of that is to make sure from a city perspective, that you actually have zoning in place and you have support from the local municipality that you can put in a drive-through that's going to, you know, create the kind of traffic and trip generation that one of these typical users is going to create. So the reason this is a good example is originally in and out was actually trying to locate in Salt Lake City. So they have rolled out just under a dozen restaurants in the state of Utah, but they've actually never entered the capital city of Salt Lake City. And part of the reason they've never done that is that there's a number of different zoning regulations that make it, quite preventative to build new retail in Salt Lake City. And because of that, they've just never been able to get in. So there was a closed Burger King and then a burned down scone cutter, which is a scone

drive-thru business, which is kind of got out. Scone cutters? That's a great name. I love that. It's too bad. It's gone by the waist out a little bit here. So there was a burned-down restaurant, and then there was a former Burger King that wasn't doing very much volume, maybe a million or a million two or something.

and In-N-Out wanted to come in and place their unit there, and Salt Lake City would not allow them to place a prototype unit unless they had a maximum of five parking stalls. Well, I don't know if you've been to an In-N-Out Burger, but they need more than five parking stalls. So that was a real problem. So it hit kind of a stalemate, and what ended up happening is Jack in-in-a-box actually opened in the Burger King instead of In-N-N-Out. And so In-N-Out came across the street to my site, which is located in South Salt Lake City, where our city had open arms as a municipal. to welcome them in. June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the

world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars, and policy experts to break down what the rulings really mean. We do this every weekday, then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day, and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso.

today wherever you get your podcast. What separates good leaders from transformational ones? I'm Jessica Chen and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading by Example, executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your podcast. How much do safety considerations go into site selection for a drive-through? Because I imagine, you know, a normal shop front, you just plonk it down in the correct zone, and there's probably not that many problems that are going to emerge.

But in something like a drive-thru, you do have things that happen where, for instance, if it gets too crowded, you start to have cars sort of coming out of the space and maybe disrupting traffic and things like that. How does that factor into it? Yeah, Tracy, it's a good question. I get asked that question so frequently, and it comes from a wide variety of people asking that question. Most of the brands that we work with are national retailers, their household names. You typically can recognize them as they're rolling off my lips. And the vast majority of them do a lot of homework on these sites, and that includes engaging a traffic engineer, that includes engaging a very talented civil engineer, and a lot of time is spent figuring out what the traffic

demand is going to look like, what the trip count is going to look like, and then making sure that humans and vehicles are moving in and out of the site in a safe manner, and that is also very efficient, and then also taking into concern how the pedestrians are coming on and off a site and how bicyclists are coming on and off a site. I would contend more attention is paid to how to work some of those issues out, then you may think. Now, that isn't being said that it always works out flawlessly because as soon as I say that, somebody could point out 10 examples that they've driven by where it is not efficient and it does not work well. And it does happen frequently. This is unfortunate. We try to spend a lot of our time at Forza, making sure we have a very efficient

site plan so that we are, is maximizing the real estate that we have and maximizing how to get customers on and off the site. Stepping back for a second, normally when you hear about zoning issues, I feel like local planners are talking about minimum parking requirements. They're like, okay, if you're going to build something here, you have to provide a minimum amount of parking. I know there's a lot of fights about this. But the issue in Salt Lake City was a maximum parking situation. They couldn't have more than five places. Why was that? And what are this sort of like other zoning? What are some generally zoning questions that come up for the drive-through concepts? Yeah, there's a lot of wonderful markets throughout the Western U.S.

and it certainly gets more challenged as you get closer to the water. But there's a number of California coastal communities that could definitely benefit from having a Chick-fil-A or somebody else like that, or even take one in my backyard, which is Park City. I'm sure In-N-Out or Chick-fil-A would love to land right in the middle of Park City. However, the county has no desire to really approve a drive-through use at that intersection. And so sometimes it's just for whatever reason, you know, certain councils feel certain way about things. And even though it is definitely a continued trend in America and has only been increasing over the last 20 to 30 years, not decreasing, it doesn't seem to really alter the way some of these councils are wired. They typically, sometimes they just don't want drive-thrus.

In the case of Salt Lake City, that was a little bit unique there. Salt Lake is really pushing for more vertical growth than anything else. And one of the ways that they're pushing for more vertical growth is by restricting open parking lots. They do not want an open, unstructured parking lot. And so part of what they're doing is pushing people to build structured parking. And that can work, but some retailers simply will not deal with a mixed-use scenario, and it's just not the way their mousetrap works. And if they can't expand to Salt Lake City, then they'll go on and build another one in Dallas

or wherever else they can get the zoning. What does creativity look like in your business? And the reason I ask is because I can imagine, you know, Joe and I, in journalism and being creative in journalism is, you know, maybe you write something in a very innovative way or you present information in a new way or you find a new way of telling a story. But in site selection, like what would be a creative choice when it comes to choosing a retail location? Sometimes it's just figuring out what would actually work for a development opportunity.

There are a lot of corridors that are mature and they're built out and they're an estableness. an established retail trade area, and you go drive them, and we might have two or three tenants that would like to locate in that trade area. And there is no land, for example. There's not like an easy no-brainer of just piece of land sitting in front of a Walmart or Kroger. And so sometimes the creativity is just trying to figure out where could we actually land the retailer? Is there a former Taco Johns or Subway or something else that's run down that we need to go call the owner of the property and say, hey, this is kind of run down, how our rental payments coming in, are you getting regular rent? So we spent a lot of our time working on lower performing

restaurant locations that already have a drive-through use and sometimes already have a building in which today's world, that is much cheaper if it's got a building most of the time, especially if we can repurpose the building. Big box retailers like a Walmart or a Costco, etc. How much of when they think it's like, okay, we all have our mind of like what those look like. There's like in the back, you know, there's a big building and then there's just as like seemingly sometimes like acres of parking. How often do they think about like, do we want to allocate some of this stuff in the middle of this parking lot to a drive-through versus just having that be more parking? If it's in advance, then it's very intentional. And for a long time when Walmart

was on their big U.S. growth spree, which was really kind of 2000 to about 20,000. 2017-2018, as they were growing, they were typically going in and they would put in as many out parcels as they could fit onto a parcel. So for example, a 200,000-foot Walmart's typically going to need about 20 to 22 acres to fit on and have enough parking for its own needs in its opinion. And then if they could buy another 10 acres that had pad frontage, then they would go buy another 10 acres. And more or less what would happen is they might have bought the entire site at $7 to $10 per

square foot, and then they turn around and they charge people like me $20 to $30 per square foot to buy one of the out parcels. And it wasn't uncommon for them to write their basis and their land down by maybe a third or half of what they might have paid for it originally. And so it really is a nice, robust business plan for them. Now, if it's an afterthought and you're going in on an existing store and you're saying, hey, look, this area of the parking field really is not that well utilized. That sounds really good if you're sitting in a boardroom in Bentonville, Arkansas, and you're sitting around trying to tell your asset management, you know, boss, hey, I'm figuring out a way to drive more revenue.

In reality, it's a nightmare. You have to get through operations. You have to, there's just so many layers, and there's so much corporate bureaucracy, and it's not the way that the retailers are really geared to figure out how to make money out of existing real estate. And so it becomes very challenged to get through that process. We've looked at a number of those. We have. have done a few of them, but I would tell you that you probably were three times as hard on the site selection side as a normal piece of land. Can shopping malls be converted into drive-through centers? Like, if you have a bunch of dead shopping malls in the country, could we just get rid of the mall and create, I don't know, two McDonald's and five Starbucks and three Taco Bells? It's a great idea. A lot of them even have periphery retail sitting around them now.

What you're watching right now is most of these mall reeds have been off on earnings for a couple of years here. And so you're starting to watch a lot of these mall reads list some of their assets for sale. Sometimes that's the entire mall. Sometimes that's just the out parcels. But it is definitely a way in which the reeds are looking at this saying we would like to create value. You have two challenges when it comes to those typically. The first challenge is what kind of redevelopment rights or what kind of development rights do the anchor tenants have over the pads? In other words, can a dealers or can a sacks dictate, hey, a building cannot be more than 28 feet in height with parapet walls and all the architectural features?

Or can a building even be built there at all? And so they may just have their handout to get paid. It may take a year to get that approval. It's just, you know, so that's kind of involved. The second part of that just has to go with what has to do with mall maintenance as far as running the property long term. and then how that is untied to the out parcel. Sometimes figuring out how to untie the expenses becomes so problematic that the companies don't move forward.

You know, it'd be funny. I was just thinking if we converted all the dead malls into massive drive-thrus, and then at some point all the drive-thrus decide we should just put a roof over the top of all our stores to make it more convenient for people, and then we're just back where we started. A gigantic food court.

Yeah. Let's talk about another thing that's come up this conversation about site selection, and that is proximity or lack of proximity to competitors. And, well, I mean, you know, it's funny because at least for a time, I think they've thinned them out a little bit. You know, like in New York City, you could be sitting in a Starbucks and see another Starbucks. I think they've gotten rid of some of that. I think that's gotten rare. But whether it's proximity to an existing location or a close competitor or a modest competitor, how does that go into site selection?

Yeah, it just goes into the model. So a retailer will typically have some kind of sales forecast as they show up and look at a new site. There are a number of different factors that go into what that model looks like and what the output comes back as an estimated first year sales volume and then typically a two or three or four year stabilized sales volume. Some industries have got this pinned down much tighter than others. For example, if you're looking at a grocery store location, the grocery casing analysts are very dialed in. They typically can figure out within a very tight degree of accuracy what a grocery store is going to do in its first full year of volume. So there's only so many sales dollars in any given trade area. The easiest way is to think of it as any like ring city. So take like Dallas, Fort Worth, for example, or even just Dallas. You have a ring around it, and there's no geographical obstruction. So just put, say, a one mile or two mile or three mile ring around the center point of being the site. And then basically you have to figure how many of the customers that exist,

in there would normally be a shopper for that concept. And then number two, how many of those can then shop at a competitor where you might lose those sales? And so once you kind of boil it in, all of that goes into coming up with an estimated sales volume for the retailer. And more or less, that's where our world lives, right? The higher the sales volume for the retailer, the more they can pay in rent. And so there's a direct correlation there. There's an occupancy cost that each retailer can afford as a percentage of their gross sales, how much they can pay in total operating expense. So in a given trade area, would the analyst or the company or the modelers say, like, come up with a total annual dollar volume that people in this area might be expected to pay

for take out coffee in a year? Yes. So you come up with that number first. Yes. They do. The retailers do it. But then, like, in terms of, like, well, like, how far away do I want to be from a, a, let's say Jack in the Box versus In-N-Out, which are kind of substitutes. They're not exactly the same thing, but one might choose one over the other on a given day. Like, how far would a Jack-in-the-box want to be from the nearest in-and-out?

That's actually a great example. A Jack-in-a-box can probably live with a mile-and-a-quarter to two-mile spacing. Why? How do you come up with that number? Talk to us about that. Well, in part, if you look at their average annual volume, I'll forget offhand, but if you check quick-service restaurant, which is typically the periodical to go to for these kind of sales. I think they're at 1.4, 1.5 national average,

million per year. In and out does not release numbers, but they're widely thought to have a number over 10 million per year per unit. And so almost 10 times. Typically, their draw is more like a 3 to 6 mile draw, and a jack in the box is more like a 1 to 2 mile draw. Chick-fil-A has a wider draw than Wendy's, right? Right. That makes sense.

You do have to think of this in terms of suburbia, though. Yeah. I mean, it's got it. You back to the soccer bonds driving Suburbanes. On that note, I have a sort of technical drive-through specific question. How much do acoustics factor in to site selection? Because things have changed a lot over the years. I think the audio technology that people are using to communicate at the drive-thru is vastly improved. Most people nowadays are probably ordering on an app anyway.

But one of the big frustrations of prior years has to be if you pull up to a McDonald's on the side of a highway and you're trying to communicate with the person inside and you're yelling at them that you want a quarter pounder with cheese and they just cannot hear you at all. Is that a factor at all anymore? Has that mostly been sort of improved through tech? It has been improved. However, the amount of customers going through the drive-through has increased. So I think in some of those cases where you have old equipment that has not been reinvested into, it for sure is still a problem on a lot of these units. Some of the newer concepts have definitely made some massive advances in that.

And then you have other groups, like to go back to Dutch Bros, for example, they don't have a squawk box. There is no ordering system. It's a human that takes your order in the parking box. Wait, did they actually call it a squawk box? Yeah. Like in finance? That's so funny.

The head of real estate does, yeah. Oh, wow. So they take your order on an iPad, and it's a human that takes your order. Oh, huh. There are massive advantages of ordering through their app, for example. and then there's a whole slew of other restaurants that are more of like a pickup service, so it's meal pickup, back to the point of saving time and not undoing buckles, Joe, right? So think of that as like a typical restaurant that you would normally never really go into,

like even a Panera, like you call ahead and then you basically, as you queue into the drive-thru, you hit on the app, I'm here, right? And then they run an order that's already kind of pre-order, pre-put together out to your car. All right. Another factor that came up, and I'm thinking again to a recent time, I went to a Starbucks in my car, minimization of left turns or other situations in which you're going to have a longer wait, or it's like, oh, when I get back on the street, am I going to have to take a left turn out and is there a light? Talk to us about traffic patterns around the location, and I imagine it might be different for like a sort of Starbucks,

which I imagine is busier in the morning and in one direction of the commute versus maybe a, in and out, which you might get on the way home or something like that, and maybe you're on the other side of the street. Talk to us about traffic and turn minimization and whatever else comes into play there. In regards to traffic, I've probably spent more time in my life behind a windshield, sitting at a corner counting cars than I would like to admit. Oh, same more. Yeah, it's pretty easy to find where the AM traffic pattern, strong AM traffic pattern is versus PM. You sit at an intersection and you watch traffic and you do that from like 8 to 10 a.m.

or you do that at 4 to 5 p.m. And then the inverse logic is there. So if it's heavier at 4 or 5 p.m., you know that the other side of the road is heavier in the morning. That's the easiest way to find any coffee site is to sit at an intersection and count cars if you're unfamiliar with that trade area. With regard to, as far as getting ingress and egress on and off the site, most of these retailers are going to care about ingress most. Probably 80% of their weight is worried about how does a car get in? You rarely want somebody to be making a left in unless it's a very important.

very safe left in at a traffic signal, a dedicated kind of left in, you know, you see those sometimes with like the raised medians. Yeah. But a right in and right out is so preferred. And if you're sitting at an intersection where you can get a right and right out on one side of the site and a full movement on the other side, that's the ideal. Chris Hatch, thank you so much for coming on Odlods. Now I feel like we have to talk to a traffic engineer and zoners. A soccer mom? Going to Starbucks? Yeah. That was really fun. Thank you so much. for having me. It gave me an excuse to get steak freets in the city. Oh, perfect.

Tracy, I loved this whole conversation. I'm trying to think where to begin. Okay, location matters. We all know that. But then you think like all these different types of retail concepts and this sort of specific things that matter to them, whether it's like what side of the road you're on or who are the other entities or are you in some other company's parking lot? I just feel like there's an endless amount to learn in this area. Totally. I also thought that the sort of evolution of what you're looking for with a physical space is also interesting. I think Tom touched on this idea that, okay, post-pandemic, things started to shift.

Like, it was much more of an almost warehouse effect or, you know, you order something online and then you pick it up, which means that the demand for locations that are on the outer fringes of shopping malls or, you know, you order. something online and then you pick it up, which means that the demand for locations that are on the outer fringes of shopping malls or easily accessible become even more important. Totally. It's also just sort of fascinating that, like, as Tom was saying, the demand for space, according to him, is still enormous. Yeah. Which is really interesting. And, you know, we talk a lot about, again, Siri office, right? And, okay, we all know that that's troubled. But the fact that there's all this other kind of Siri, and some of it is absolutely. booming. Absolutely. And there is that sort of bifurcation or segmentation in the market as well.

Were you convinced at all to get out of the car to get your coffee to avoid the drive-thru or not? Are you even more dedicated to the coffee drive-thru now? No. I mean, actually, so the most recent time I went to a Starbucks, I did get out of the car. It really is conditional. Like part of it is like the weather. Part of it is how annoying my kids are being at any given time. Like these are like. the big factors that go in and like I swear do I have to take a left turn to get it. This is like a big deal. Like I know it sounds silly.

Well, now we should all feel better knowing that there are people out there who are taking the stuff into consideration. Yeah, right. Like as Chris was saying like he that he would sit there at a corner and just count the number of cars making various turns from eight to ten and then come back from four to six or whatever and count again as like totally fascinating to me. Yep. Shall we leave it there?

Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Jill Wisenthal. You can follow me at the stalwart. Follow our guests, Tom McGee.

He's at Tom McGee's CEO and Chris Hatch. His handle is at NNNN income. Follow our producers, Carmen Rodriguez, at Carmen Armin, Dashel Bennett at Dashpot, and Kel Brooks at Kel Brooks. Thank you to our producer, Moses, Ondam. For more OddLod's content, go to Bloomberg.com slash oddlots where we have a blog, transcript, and a newsletter, and check out the Discord. Discord.org.g. slash oddlots. Chat with fellow listeners 24-7.

It's one of my favorite places to hang out online. Go check it out. And if you enjoy Oddlots, if you like it when we dig into site selection, then please leave us a positive review on your favorite podcast platform. And don't forget, if you are a Bloomberg subscriber, you can listen to all our episodes, add-free, just connect your Bloomberg account to Apple Podcasts. Thanks for listening. Eric Tech returns to San Francisco, June 3rd and 4th. Join me, Emily Chang, along with Tom Giles,

as we convene the CEOs, investors, and innovators shaping what's next in technology. Powered by Bloomberg's Global Newsroom and unrivaled terminal data will break down the capital, connectivity, and big ideas driving the industry forward. Be part of the conversation. Register now at Bloomberglive.com slash tech. That's Bloomberg. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading by Example, we'll sit down with executives like

Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts.