What is the current state of restaurant real estate, and what should restaurateurs consider when looking for locations this year?

We are experiencing enormous tectonic shifts in real estate right now with a number of contributing factors. During the recession, and for a few years after, retail/restaurant tenant space development effectively stopped until the existing supply was leased up. Now, we’re seeing development come back aggressively, but demand is outpacing the limited supply as competition for first-generation traditional restaurant spaces has become very high. This aggressive development cycle means that supply is just now catching up with demand and it will have positive impacts on the industry.

Another factor causing this shift is the enormous change in U.S. demographics and buying power. In 2020, Millennials will hold more than 50 percent of U.S. consumer buying power. In 2025, they will hold more than 75 percent. Their living preferences are very different from older generations, as they are much more urban- and semi-urban focused. They are also currently more focused on renting than owning single-family homes. Because of this, the fastest-growing cities right now are second-tier in size. Those cities are appealing to Millennials because they focused on growing their urban and semi-urban core areas, and offer more affordable living alternatives. (Click here for the 11 top cities Millennials are moving to.)

Given all of these changes, my top three considerations for restaurateurs are:

  1. Know your target guest. Operators should do whatever they can to get to know their target customer and what motivates them. Where do they live? Where do they shop and how do they travel? And I don’t mean how consumers travel outside their home area: it’s how they move within their trade area that counts. Anchor stores are no longer good indicators of where consumers purchase their retail goods due to fierce competition and the proliferation of online shopping. Be willing to explore other non-traditional real estate options.  Invest in creating an accurate, data-driven real estate model. This is more complex than what your broker might typically provide. We work with a company that uses mobility data to track customer behavior. This means that any time someone leaves their house or office, and stops for more than 5 minutes, they are tracked and tied into customer segmentation analysis. Using mobility data and geographic information systems consultants can develop your ideal real estate model and evaluate potential sites against that ideal. This helps to mitigate the substantial and costly risks of “striking out” with a new location. 
  2. Understand the costs. Not every site is going to cost the same to develop, so you really have to do a detailed site investigation and determine your actual costs for a given site. Operators can no longer use the same generalities they used to because construction costs are increasing dramatically, and standard delivery conditions are changing. Additionally, regulations governing restaurant development can vary greatly based on individual municipalities. There are now different requirements for grease traps by city, and water quality and storm water management will continue to be a front-burner issue. For example, the EPA got involved with a county in the Atlanta Metro area because of poor water quality going back into the sewage system. For a 2,500-square-foot fast-casual restaurant concept they require a 3,000-gallon grease interceptor, when a 1,500-gallon interceptor used to be standard. On ground-up deals we’re now having to address water quality issues even on small sites that add significant costs relative to the real estate deal. (I’ll go into water quality issues in more detail next month.) Again, these are new issues that up until a couple of years ago, restaurant operators never had to deal with. And no one sees it. It’s a lot of money that has no effect on the guest experience. It’s also incredibly complex because there is no national standard. So, make sure you do a comprehensive investigation on any potential site.
  3. Know your deal. There is no such thing as a standard lease or purchase agreement anymore. Since the recession, everyone has come up with different ways of packaging different “delivery conditions” and the lease work letters no longer contain standard definitions. The changing of two words can impact something that can cost hundreds of thousands of dollars and move it from the landlords to the tenant’s responsibility. Additionally, know the value of each of these work letter items and what they truly mean for you.

In general, there is more competition for customers, customer dollars and real estate. So, do your homework and invest in your homework and build it into your pro forma. Not every deal is going to work out, but knowing your deal and the costs associated with it will save a lot of time and money in the long run.

Need more information on site selection? 

Steve Starr, president of starrdesign in Charlotte, N.C., is a nationally recognized leader in restaurant and retail design. While his insight and expertise span the hospitality industry, his focus is on branding, consumer behavior and the development process.

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