The Future of Restaurant Real Estate
Last Updated on April 6, 2023 by Morgan Beard
Restaurants are known for strategically positioning themselves in locations with high-density foot traffic — or as Harry Sonneborn and Ray Kroc might say: “We aren’t in the restaurant business; we are in the real estate business.” Being the businessmen credited with the global expansion of McDonald’s, those would be words to live by under normal circumstances. But normal isn’t normal anymore. In fact, “location, location, location” doesn’t always translate into success.
A shift in consumer dining habits has taken place, particularly when it comes to eating at restaurants. The idea of sitting down for a chef-prepared meal has lost some of its appeal. Instead, consumers are now turning to delivery. In fact, one delivery-only restaurants saw a 400% year-over-year increase in same-store sales.
A brick and mortar-first strategy is certainly ideal for a commercial real estate restaurant approach, but many consumers now favor convenience over the experience the traditional restaurant setting provides. They think about whether an item on the menu travels well for home delivery rather than the chances of getting a four-top at some trendy establishment.
The restaurant landscape has changed — and success is now contingent on how you respond.
The changing 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 used to keeping themselves 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.
How did covid impact the restaurant industry?
Let’s get the most obvious issue out of the way: the pandemic. Restaurant occupiers have been forced to make real estate decisions at the drop of a hat, navigating increasingly complex and rapidly changing local regulations.
Without having a baseline understanding of the legal and financial components of individual leases, many restaurant operators were grossly unequipped to deal with this dynamic. Of course, this situation became even more complicated by the simple fact that the restaurant industry is still scrambling to fill job openings.
This led to more than 10% of restaurants permanently shuttering. Despite those closures, there is a silver lining: The National Restaurant Association projected that 2021’s food and beverage sales would see a 20% increase from 2020, coming in at $789 billion. And with fewer dining options now available, the restaurants that are still open — or now opening — will likely be busier.
Is the customer journey still the same?
The way in which customers “dine out” has changed, naturally. Throughout the pandemic, 45% of customers are eating less fast food than normal. They’re also baking more than usual (33%) and have plans to save and budget more than in the past (40%). So it shouldn’t come as much of a surprise that 32% of consumers now plan to make more home-cooked meals.
With all of this in mind, a new restaurant real estate strategy has emerged: the omnichannel restaurant. Clothing retailers across the country have already tested such an approach, and their customers have quickly grown accustomed to mobile ordering, online shopping, curbside delivery, and other retail experiences. They now expect the same from any brand they do business with — including restaurants.
As luck would have it, new technology in the restaurant industry has made this possible. It has allowed even the smallest of mom-and-pop eateries to reach diners. New real estate trends are also emerging to support the way in which restaurant dining has evolved. It’s just a matter of learning to adapt for the future of the restaurant industry.
Where is the future of the restaurant industry headed?
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:
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 restauranteurs 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.
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 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.
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.
Embracing the future of the restaurant industry
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 strategy for those in the space. Otherwise, it will be difficult to compete. The following are often the best places to start:
1. Take advantage of open storefronts.
Commercial vacancy rates going up pose a unique opportunity for the restaurant industry. Although endcaps might be hard to come by, many other second-generation retail spaces are ripe for the picking — thanks in no small part to the many Subway, Dunkin’, Pizza Hut, and even Starbucks locations that closed up shop over the last few years. 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 as much as 50% of the initial investment 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.
Most 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.
More importantly, 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.
The future of the restaurant industry will be a combination of technology solutions, enhanced customer experiences, and sound restaurant real estate strategies. Strike the right balance between all three, and your business will be one step closer to lasting success.
The importance of 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 to better evaluate the risks and opportunities within a real estate portfolio.
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, headcount, space capacity, and more. Doing such activities by hand can be a time-consuming process, not to mention one that is prone to human error.
Beyond that, our platform allows all team members to connect and collaborate throughout the lease management process. Few questions remain about whether someone has checked a certain box; it’s all right there for everyone to see. All vital information is housed in a single place, accessible to everyone on the team.
If you’d like to learn more about what Occupier can do for your restaurant real estate management process, please let us know. A member of our team would be more than happy to discuss your operations and find a solution that’s right for you.
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