To say that the restaurant industry is sending mixed signals could be the understatement of the year. The National Restaurant Association expected restaurant sales in 2024 to top $1 trillion for the first time ever. But as the year has progressed, the number of operators who anticipated sales growth in the coming months dipped to 28 percent in August from 40 percent in April amid inflation and economic uncertainty, according to the organization’s latest performance index survey.
At the same time, the fortunes of the major restaurant segments are largely diverging as consumer preferences change and new technologies enhance the convenience of digital ordering and delivery. Full-service operators such as Denny’s and TGI Friday’s are closing locations, while many quick-service and fast-casual restaurants continue to pursue ambitious expansion plans, notes Jonathan Lapat, a managing principal with SRS Real Estate Partners in Boston. Raising Cane’s, for example, anticipates opening 100 restaurants in 2024 alone by year’s end, and it wants to open as many in 2025 to increase its location count to 1,000.
“One restaurant segment is dipping, and the other is trending upward,” adds Lapat, whose team is securing Raising Cane’s locations in New England. “We continue to see the growth in a number of fast-casual concepts, and their sales tend to reflect that.”
Executing expansion plans has become more difficult, however. Thanks to high retail occupancies and a lack of supply, availability in well-located centers is tough to find, say Lapat and John Few, an SRS Real Estate managing principal in Newport Beach, California. Those challenges along with softening restaurant sales over the summer have contributed to slowing leasing, observes Few, who represents restaurant and entertainment brands.
“I think everyone has been holding their breath for the last quarter or so given some macroeconomic uncertainty while also waiting to see what was going to happen with the election,” he says. “The environment hasn’t necessarily put restaurant expansions on hold, but brands are saying, ‘If it’s not mission critical, we can wait a little bit to see where things shake out.’”
Second-Generation Value
On the bright side of that equation, by being patient, growth-minded food-and-beverage brands could be better positioned to take advantage of second-generation asset opportunities. In addition to Denny’s and TGI Fridays, which filed for bankruptcy in early November, longtime operators such as Applebee’s, Red Lobster and Outback Steakhouse have either closed or are in the process of closing hundreds of locations in the aggregate.
“As those boxes become available, it’s safe to assume that they will be gobbled up pretty quickly by newer and arguably more relevant concepts,” says Lapat. “The locations typically continue to be spot-on. It’s just that certain concepts no longer appeal to today’s consumer.”
Additionally, second-generation restaurant assets typically have hoods, vents, grease traps, walk-in freezers and other equipment that would otherwise greatly add to the operator’s expense of outfitting a new building. While restaurants may choose to replace some of those items in second-generation properties, they should still see substantial savings, especially with landlords doling out fewer tenant improvement dollars given the retail real estate supply and demand imbalance, Few says.
Still, elevated borrowing costs present a challenge to funding capital improvements. Although the Federal Reserve has cut the federal funds rate by 75 basis points since September, the benchmark secured overnight financing rate (SOFR) remains roughly five percentage points above where it was a couple of years ago. Ultimately, however, that could work in the favor of brands with strong balance sheets.
“Cash is king,” Few declares. “If you’re fueling growth through cash flow or have some dry powder, it’s a good time to look for opportunities because there may be less competition from operators who have to take on debt.”
Entertainment Lull
The restaurant industry’s “eatertainment” segment is also experiencing some expansion hiccups. Indoor putt-putt, bowling and other venues have slowed their growth as a result of softening restaurant sales, Few says.
Meanwhile, outdoor brands such as pickleball operator Chicken N Pickle emerged in the Midwest, where it’s relatively easy to find parcels to accommodate such developments, he adds. That’s not necessarily the case on the more densely populated coasts, where the availability and cost of land are bigger issues, he and Lapat agree. What’s more, some landlords with enough land are reluctant to do deals with eatertainment users.
“Rightly or wrongly, owners of even second- or third-rate malls or shopping centers think that eventually they’ll see densification at the properties through hotels, apartments or other development,” Few says. “All these eatertainment concepts want to move into those markets, but the deals are just harder to execute in a state like California.”
— By Joe Gose. This article was written in conjunction with SRS Real Estate Partners, a content partner of Shopping Center Business.