Do you want to join the ranks of the few that really understand Commercial Real…
It’s Valentine’s day- the second busiest day for restaurants in the United States, next to Mother’s Day. On average, U.S. citizens will spend a total of $4.5 billion on dining across the country with an average price of $87.00 to over $200.00 per couple.
For those of us who make their living in commercial real estate, we’ve come to understand that restaurants can be the best and worst tenants in the retail sector. While considered to be an anchor tenant, these tenants are much more delicate and often require shorter lease terms due to the consistent changing of culinary trends.
This is why it is important to be more selective of tenants. The goal should always be to attract a corporate-backed chain with strong credit in a well-established niche. Why? Because, these larger restaurant chains will draw in additional tenants, give you the ability to compress CAP rates, allow you to attract premium debt, and are more resilient to economic downturns due to their strong cash flows.
But tastes change over time, and this is one of the main factors which affects the lifespan of restaurant concepts. Currently, we see a move away from many of the larger restaurant chains that reached their height of success in the mid-1990’s and early 2000’s. The majority of chains which seem to be falling out of favor include: low to mid-scale steakhouses and seafood restaurants which are not located near a large body of water. Former anchor brands including Lone Star Steakhouse, Black Angus Steak House, Ponderosa Steak House, Legal Seafoods, and Red Lobster have closed numerous locations over the past five years as U.S.diners have begun to favor of a new experience. Even though underperforming locations have shuttered, these corporate-backed brands have shown resilience. With the ability to be sold off to large capital corps and restructured, these brands are showing resilience while ensuring sustained rents for landlords.
Red Lobster is a prime example of what can happen when the tastes of your consumers change and something we should look at a little closer. This concept was once valued in the billions, but as of 2014 Darden Restaurants dropped the chain due to lackluster sales. The drop in sales was due to two main factors: heavy media coverage on the quality of farm-raised seafood products, and a shift by the vast majority of diners preferring fast service and environmentally conscious sourcing. This and many other factors caused former anchor tenants like Red Lobster to drop out of favor with diners. Since being purchased by Golden Gate Capital, the investment firm has taken many steps to rebrand the chain and structure their menu and brand identity to fit new dining trends, which it might not have been able to do if it didn’t have so much brand equity.
That being said, Americans are still spending money at restaurants; it’s just where they spend their dollars. The National Restaurant Association reported 2016 year-end industry sales of $782.7 billion which is a 10.36% increase from 2015. There are many new restaurant concepts out there that are excelling and could be a huge asset to your commercial property.
Below is a group of three different restaurant concepts which are succeeding in the current market and look to be on the rise. Featured concepts and brands were selected due to public company financial filings and expansion plans from the past four years and current company announcements and while they may not be huge names like Applebee’s, they have a support system that a one off restaurant may be lacking.
The first of which is Barbecue. You no longer have to take a trip down south for great smoked briskets or ribs that have been basted for hours with sweet and tangy sauces. Concepts like Mission Barbecue are taking charge with a 2015 average unit sales volume of $1.9 Million and a large expansion planned for mid to late 2017. Other barbecue concepts to watch include Fiorella’s Jack Stack Barbecue and Dinosaur Bar-B-Que. Currently, these brands are located throughout East Coast, Midwest, and Southern markets, but each has announced plans to expand further in 2017.
There also seems to be a renaissance aimed at Mexican cuisine in America. This is nothing like the initial boom of the 1970’s and 1980’s which gave us former anchor tenants like Chi’s-Chi’s and Rio Bravo which went dark in 2000 & 2004 respectively. Unlike these failed concepts, these taquerias and tequilarias have a smaller amount of menu selections and thrive in urban and secondary markets where space may be more limited. These restaurants have a national average of $3.5 million in sales per unit and include names such as Torchy’s Tacos, Bartaco, and Rocco’s Tacos and Tequila Bar.
Chicken restaurants are also on the rise. But, these new concepts have distanced themselves from the household name brands like KFC and Chick-fil-A. Concepts including the Portuguese-themed Nando’s are making their plans for expansion well known. The Nando’s brand made a splash in Europe backed by celebrities like David Beckham before migrating to the US in 2008. Since opening, it has grown to more than 20 locations throughout the DC metro area. The brand plans to expand into many urban markets hoping to have at least 10 locations in each of the chosen markets over the course of the next decade. Another concept in this category is the Asian-inspired Bon Chon. This Korean fried chicken concept expanded to 70 locations in the US in the span of only four years and has gained popularity in both east coast and west coast markets.
Each of these concepts and many other just like them are expanding due to the demand for a new type of dining experience but also provide the security of being part of a chain. So, if you are looking to force the appreciation of your retail asset, research where they are looking to set up shop and see if your property meets their needs. The right tenant at the right time is the quickest way to raise the value of any property, and these restaurant concepts are a great place to start.