Over the past five years, the many major MSAs have seen tremendous growth and diversification within the food and beverage space. But the onset of COVID-19 has cut into consumers’ disposable incomes, essentially shrinking the customer base and creating another mechanism by which restaurant sales are reduced.
Restaurants that have been able to pivot to more takeout and delivery services, convert parking or other spaces into outdoor seating, and minimize their supply-chain disruptions by tweaking inventory are carving out competitive advantages in the current environment.
“The extent to which operators can create outdoor seating can make or break a restaurant, depending on the concept,” says Emily Durham, partner and director of hospitality services at Houston-based brokerage firm Waterman Steele Real Estate Advisors. “Those that are really converting to outdoor seating could be doing anywhere from 60 to 80 percent of pre-COVID-19 sales.”
In areas like Texas, restaurant operators have also benefitted from warm weather and bureaucratic support in various forms, such as the passing of legislation that allows alcohol to-go sales and food trucks to operate at bars. In September, Texas Gov. Greg Abbott signed into law a bill that allows bars that derive at least 51 percent of their sales from food to operate at 75 percent capacity. Other warm climate markets, like California, have issued orders to allow more outdoor dining areas.
In addition, savvy operators have found ways to unlock real estate value through the use of ghost kitchens and commissary spaces, which facilitate third-party delivery services and reduce occupancy costs.
But the degree to which restaurant operators can effectively undertake these changes varies from one to the other. Some restaurants, such as franchised concepts, are limited in what they can do based on corporate by-laws. Mom-and-pop restaurants may lack the credit and access to capital to adjust their operations. Fine dining concepts, as another example, may not be able to shift to takeout and delivery without compromising their brand.
As for landlords, the number and pace of inquiries for restaurant space that they are fielding depends heavily on the type of spaces they have available, particularly endcaps, drive-thrus and freestanding pad sites.
“Demand for endcaps is still very strong, and landlords are realizing that existing drive-thrus, sidewalks and parking spaces can be converted to patios and food pick-up stations,” says Paul Vernon, executive vice president of Henry S. Miller’s retail division. “As for patio seating and parking lots and space for takeout and delivery, the only way through this has been for landlords and tenants to work together.”
Waterman Steele represents several restaurant concepts that are housed within malls. In recent months, the firm has worked with mall owners on behalf of those tenants to address aspects of operation that have been uniquely impacted by the pandemic.
“Malls have to close earlier now, so it’s only through a relationship with the landlord that exceptions can be made for things like security personnel on their side of the building, doors being unlocked longer when the rest of the mall is closing earlier, reduced valet services or limited cleanup,” says Durham.
“Those kinds of operational concerns that we never thought would be issues have become issues, and they rely on the kindness of the landlord since there’s usually nothing in the lease for those provisions,” she continues.
The question of which restaurants will survive the pandemic is largely a function of how much financial and operational flexibility the various concepts have, and how quickly those operators can recognize the key trends and execute on them.
“The great thing about restaurateurs is that they are entrepreneurs at heart, and they can adapt pretty quickly to changes in the market,” says Vernon. “One example of this ingenuity and adaptability is the introduction of family-style meals, which were especially popular when more stringent shelter-in-place orders were in effect in Texas. Gov. Abbott’s waiver to allow to-go alcohol sales also added to the one-stop shopping experience.“
Vernon and Durham both added that they expect the family-style offerings to remain popular throughout the holiday season.
With reports that COVID-19 vaccines may be available to the general public as early as the second quarter of 2021, restaurant operators are tasked with judging the staying power of the new ways of operating. The flexibility to pivot back to pre-pandemic ways of doing business will be a key determinant of which concepts emerge successfully from the public health crisis.
In addition to the simple pivot to family-style meals, Vernon gave another example of how some groups of restaurants have worked together to minimize disruption in their supply chains. He says that at the beginning of the pandemic, when the operating landscape was most uncertain, concepts that were under construction or in the process of getting stores off the ground struggled the most with their supply chains.
“In terms of ordering food, there were some disruptions during the shutdown as operators reduced their menus because they needed to cut costs or were understaffed,” he says. “But in some cases, it wasn’t economically feasible for their vendors to deliver small quantities of food and supplies. So some of these operators banded together to place minimum bulk orders and split the costs. Those were the types of adjustments that had to be made.”
Concepts with proven, established takeout and delivery services are faring well during the pandemic, as these platforms have sustained revenue and allowed operators to reduce costs associated with dine-in service, most notably labor. But some of these concepts are not content with just being profitable with their existing locations; they’re actively expanding within the Texas markets.
Britt Morrison, senior vice president in the Austin, Texas, office of Weitzman, cites Pluckers, a fast-casual chicken wings concept that was founded in Austin, as one example of a restaurant that is actively searching for new locations. Concepts that offer slightly more upscale dining experiences, like pizza restaurant Via 313 and Asian eatery Qi, are also expanding both within and beyond the state capital.
“A few months ago, it was crazy to think of expanding, but Austin is the kind of market where consumers are very interested in what’s new and trendy,” says Morrison. “There are new places where you can’t get reservations that are becoming the hottest things for months instead of weeks since there’s so little competition and the market is starved for new concepts. So there’s been a shift in the thinking.”
Another concept that has recently announced aggressive expansion plans is Mooyah Burgers, Fries & Shakes, which is opening 10 additional restaurants throughout the Dallas-Fort Worth metroplex. In addition, Torchy’s Tacos, an Austin-based concept that started as a food truck in 2006, recently received a $400 million equity investment to fund future expansions.
Some new restaurants that are coming on line are operating from ghost kitchens. Leasing kitchen space in one of these second-generation locations is significantly cheaper than building out interior space in a traditional brick-and-mortar restaurant space. The important thing is that the operators can cook and deliver food from a location that serves most of the trade area, says Morrison.
“You can’t replicate the experiences of a traditional restaurant in terms of ambiance and tableside service in a ghost kitchen, but you can reduce overhead costs and create an environment where you turn and burn orders as quickly as possible,” he explains. “For what they allow, ghost kitchens are highly efficient, and they work for any concept whose success is based on volume.”
Durham of Waterman Steele notes that demand for ghost kitchen space was growing before the pandemic, brought on by the rise of third-party delivery apps like DoorDash and Uber Eats. But the supply of these spaces is currently not equal to the growing demand.
“It’s hard to see the elevated demand for delivery services going away anytime soon,” she says. “But there aren’t a lot of turnkey buildings with commercial kitchens in them that are just sitting there ready to go. Especially now that owners of ghost kitchens are housing more and more concepts, they really have to be built out like indoor food courts.”
Kitchen United Mix is an example of a new ghost kitchen in Austin from which some 20 operators and providers of many different types of cuisine have begun to cook, sell and deliver food. Some of these concepts don’t even have brick-and-mortar locations yet, but being in a location that allows them to serve dense populations keeps their margins solidly in the black, Morrison says.
Brenna Wadleigh, CEO of Dallas-based retail developer N3 Real Estate, pointed to It’s Just Wings, a concept owned by Chili’s and Maggiano’s parent company Brinker International, as another example of an operator that is skillfully navigating the new market conditions via unusual real estate strategies.
“What Brinker is doing with It’s Just Wings — essentially operating ghost kitchens out of their own restaurants to salvage their casual dining concepts that have huge rents and no customers coming in — is a smart use of existing real estate,” says Wadleigh. “They’re introducing a concept with quality food at affordable price points that can be prepared in and delivered from kitchens that are ready to go but which aren’t being fully utilized.”
A couple of years ago, N3 made a concerted effort to reduce the percentage of fast-casual restaurants in its portfolio. According to Wadleigh, the decision stemmed largely from the substantially elevated amount of capital investment coming into the food and beverage space — a market in which users already operate with notoriously thin margins.
“There will be some long-term changes in the thinking behind how much weight restaurants should hold in centers and portfolios,” says Wadleigh. “Before COVID-19, everybody was about experience, entertainment, food and beverage and bringing traffic to centers.”
“That’s still a very valid investment and operating thesis, especially for lifestyle centers,” she continues. “But owners of those centers really have to focus on filling those spaces with strong brands. Some of these landlords have even hired small business consultants to evaluate their chef-driven restaurant concepts and whether the tenant improvements that allow that restaurant to operate will pan out.”
Some restaurant operators, however, are taking less ingenuous and entrepreneurial approaches and are simply trying to capitalize on depressed demand amid a recession to lock in lower rental rates. Landlords typically recognize this approach for what it is, though they have in some cases been willing to give slight discounts to strong operators.
But professionals who have spent many years in the industry are seeing the strongest operators distance themselves from the pack. The ability to adapt flexible uses of real estate lies at the core of their success.
— By Taylor Williams. This article originally appeared in the November 2020 issue of Shopping Center Business.