The Future of Restaurant Real Estate

Last Updated on December 7, 2023 by Morgan Beard

52% of restaurateurs plan to expand their business this year! 

For those in restaurant expansion mode, Ray Kroc’s famous quote from circa 1957, still holds true — “we aren’t in the restaurant business; we are in the real estate business”

As the businessman credited with the global expansion of McDonald’s, those words stood the test of time and continue to influence restaurant real estate success.

Today, a shift in consumer dining habits is underway. Convenience, speed, accessibility are pillars for consumers who are looking to grab a quick bit while on the go.

A brick and mortar-first strategy with a clear understanding of your restaurant concepts consumer base is an ideal approach.

The restaurant landscape has changed — and success is now contingent on how you respond.

Evolving Restaurant Landscape

Adaptation is something commercial real estate professionals have grown accustomed to. This is especially true in restaurant real estate. From store closures and outdoor expansions to staff shortages and supply chain issues, restaurant operators are certainly accustomed to staying on their toes.

A sound restaurant real estate strategy has never been more important than in the last couple of years, due in no small part to the changing dining landscape. But there are still a few questions left to be answered before you can settle on the right strategy for your business.

The Future of the Restaurant Industry

Change has always been a constant in the restaurant industry. Just these past few years have brought the chicken sandwich war, gourmet mall dining, rainbow bagels, extreme milkshakes, and the confusing “shared plate” craze. However, being in an almost perpetual state of flux has helped position many restauranteurs to quickly respond. They did just that in spades, ushering in the likes of:

Off-premises dining: 

Eating meals in a place other than a restaurant is here to stay. Even before the pandemic, Forbes reported that 86% of consumers now use off-premises ordering channels at least once a month. The move has paved the way for restaurateurs to experiment with food delivery. Prefixed family dinners, meal subscriptions, grocery delivery, and home-cooked meal kits are just a few avenues in which restaurants are continuing to get their brand and food in front of customers at home.

Ghost kitchens: 

The ghost kitchen concept has gained real traction as of late, so much so that CBRE believes it will account for 21% of the U.S. restaurant industry by 2025. Hospitality Technology has even higher expectations, believing the ghost kitchen concept will become a $71.4 billion industry by 2027. From an operational perspective, this makes total sense. These “virtual” kitchens meet the growing demand for online and mobile ordering. They also help restauranteurs save on overhead costs such as rent, staffing expenditures, appliance investments, and so on.

Franchises: 

Franchises saw strong growth in 2021, and chances are good that the trend will continue for the restaurant industry in the near future. A report from the International Franchise Association estimates the net gain of 26,000 franchised small businesses just this last year, bringing the total number of franchises to 780,188 in the U.S. alone. A large part of the reason comes down to this model’s customer base: one-third dines indoors, one-third carries out, and one-third orders for delivery. It’s much more resilient should the nation face another lockdown.

Expansions: 

Over the last five to seven years, it has been difficult for restaurants to find affordable sites. Plenty of deals are now available for second-generation retail spaces, however, allowing smaller restaurant brands to seriously consider including an expansion in their restaurant real estate strategy — and do so at a fraction of the cost. In fact, some landlords are willing to offer hundreds of thousands of dollars in allowances to fill vacant retail spaces.

Each of these changes puts the more traditional restaurant real estate strategy into question. Is there a better approach to getting food in front of customers? The answer is a resounding yes. In fact, there are a number of strategies to test in the coming year.

Restaurant Real Estate Strategies to Embrace

At Occupier, we’ve been witness to a series of new waves in restaurant real estate — all set to serve the ever-evolving restaurant industry. But this often means a change in real estate strategy.  The following are often the best places to start:

1. Take advantage of open storefronts

Commercial vacancy rates are tough to come by as retail & restauranters have recovered post-covid. Although endcaps might be hard to come by, many other second-generation retail spaces in smaller markets are ripe for the picking. The build-out would be minimal to meet a new tenant’s needs. A few modifications are often all that’s necessary, shortening the time it takes to open a new restaurant location to just three months in some cases.

Besides, most landlords are open to negotiations for spaces sitting vacant, and more attractive terms can save tenants on their base rents when leasing second-generation spaces. Reach out to area landlords to gauge interest and determine whether they’ve got a space that’s a good fit for your brand and customer base.

2. Explore the ghost kitchen concept

Almost everyone in the restaurant industry has heard of this new approach to dining, but some might still be wondering how ghost kitchens actually work. The ghost kitchen concept functions much like any other commercial kitchen concept, but with one exception: no dining space. One restaurant can set up shop in another restaurant’s kitchen, lowering overhead and opening itself up to new markets available through delivery.

Perhaps you want to test out a new menu or new market before committing to a brick-and-mortar location. A “shadow” kitchen makes this possible at a fairly low cost. Should you need help exploring this option, Reef Technology has become a major player in the space. The company is currently aiming to facilitate 10,000 ghost kitchen concept locations.

3. Adopt an omnichannel restaurant approach

Although people might be returning to brick-and-mortar establishments, many have grown accustomed to the conveniences offered over the last couple of years. Meet consumers where they are by adopting an omnichannel restaurant approach. This customer-centric approach to dining offers multiple alternatives for eating out. Delivery, pickup, drive-thru, and online ordering can all support the traditional dine-in option.

But don’t make the mistake of relying on your current POS system. New technology in restaurants will be the enabler for such efforts. Invest in solutions that support not only transactions, but also customization and data collection. Case in point: Tropical Smoothie took its dine-in experience virtual by enabling customized smoothies for online and mobile sales. Come quarter three of 2021, and digital sales made up 75% of the company’s sales growth.

It’s also important to evaluate how this omnichannel approach fits into your overarching restaurant real estate strategy. For example, is a mix of brick-and-mortar locations, pop-ups, and ghost kitchens necessary to see the strategy through? Is an outdoor dining space ideal? What about parking for pickup orders? Do you need warehouse space for preparing and packaging meal kit deliveries?

4. Redesign the customer experience

The customer experience in restaurants has never been more important than it is today. Consumers enter the brick-and-mortar space with certain expectations for technology, engagement, safety, and so on. Fail to meet even one of these expectations, and patrons will look elsewhere to satisfy their next craving.

Remove common pain points and put customers in control of their own experience with digital menus, self-ordering, and mobile payments. Do the same for those swinging in for takeout with self-service kiosks, pickup cubbies, and so on. Automating such processes makes for a more convenient, seamless customer experience in restaurants.

Restaurant Real Estate Planning

All solid restaurant real estate strategies start with site selections, market surveys, new location visits in order to understand the surrounding area and the potential competition or opportunities.  From there, you’ll start to evaluate what makes the perfect space, how the operating costs impact the financial projections for your real estate portfolio.

Market Surveys:

Thoroughly understanding your target consumer market, their dining habits and preferences is the first step here. Then survey existing customer bases for input as well. Market research examines factors like area incomes, employment, tourism rates, and population density. Ask yourself, are there apartment buildings or office buildings nearby. Are those spaces full of potential hungry patrons who meet you target audience?

Site Selections:

Conducting visits and assessments of potential new locations is crucial. Evaluate site accessibility, visibility to car and foot traffic, neighborhood demographics, proximity to other restaurants or anchor retailers, parking availability, and public transportation options. Location analytics tools like Geographic Information Systems (GIS) software can map ideal site criteria to narrow options.

Competitive Analysis:

Research direct and indirect competitors in the area to analyze their menus, price points, promotional strategies, and differentiators. Drive the neighborhood at varying times/days to directly observe customer traffic volume. Assess competitors’ online reviews and brand sentiment.

Financial Modeling:

Build out a detailed profit and loss statement model incorporating projected gross sales, ingredient and labor costs, operating expenses like rent and utilities, one-time build out investments, and target profit margins. Stress test various scenarios.

This rigorous planning directly informs real estate decisions across:

Consumer & Target Markets:

Define your ideal customer profile based on psychographics, demographics, behaviors and preferences. Translate this into a geographic target market definition in order to identify prime locations.

Comps & Negotiations:

Research sales history of the site or similar locales. Determine average rents and CAM fees in the area. Prepare lease negotiation strategy that makes you appealing to Landlords.

Lease Execution & Build Out:

Quantify necessary investments for lighting, flooring, equipment and layout. Define priorities – heavy bar focus or expanded kitchen? Outdoor patio space? Validate budgets and timelines.

The future of the restaurant industry will rely on a bullet-proof real estate strategy layered with an unbeatable combination of technology solutions, enhanced customer experiences, and sound restaurant real estate execution. Strike the right balance between all three, and your business will be one step closer to lasting success.

Restaurant Lease Management Software

A large part of a sound restaurant real estate strategy often hinges on your choice of lease management software. That’s where Occupier can step it. Our platform automates many of the processes used to track critical dates, clauses, and financial obligations associated with a lease — and multiple leases, at that. It also offers the functionality of exporting reports, allowing team members like your real estate broker, leadership and operations to collaborate on the entire lease lifecyle.  

Should you need additional information on a property, Lease Administration by Occupier can pull all the necessary data points to make strategic decisions around square footage, space capacity, and the ROI of each lease.

Need lease management real estate resources? Check out our resource hub to get guides, spreadsheets, templates to navigate your restaurant real estate expansion goals.