The Orange Report – 2018 Q3

The Orange Report – 2018 Q3

The Evolving Shape of the Restaurant Industry

Restaurants, in some form, date back to ancient China and the Roman Empire. Their modern incarnation can be traced back to eighteenth century France. Today, they are a staple of everyday life and one of the world’s most competitive industries. In May of 2015, US restaurant sales overtook grocery sales for the first time ever, a trend that has continued into 2018 according to the National Restaurant Association.
LEASE RATE - $13.80
VACANCY - 5.4%

RETAIL

LEASE RATE - $4.42
VACANCY - 4.9%

INDUSTRIAL

LEASE RATE - $19.98
VACANCY - 6.8%

OFFICE

Like any highly competitive marketplace, evolution and change is the norm. Savvy retail property investors would do well to stay ahead of the trends shaping the future of the restaurant industry. These highly sought-after tenants give life and personality to a retail development. A good restaurant or two is the difference between a shopping center that is regarded as “part of the neighborhood,” or merely a pitstop on the way to somewhere the consumer would rather spend their time. Though restaurants have fared better in the digital age than their neighbors in the hard goods sector, restaurants are not immune to changing consumer preferences created by technology. Accordingly, the industry is finding innovative ways to keep up with everincreasing consumer expectations for both convenience and quality, as well delivering a memorable “experience” to the consumer.
“Experience” is a word that you will hear thrown around a lot in any discussion of current day retail trends. Everyone from financial planners to department stores are striving to convince you, the consumer, to spend your precious time in their establishment instead of on your couch in front of your iPad. Full-service restaurants have a leg up here – a quality ”experience“ driven by excellent food, décor, and customer service has always been the core of their business model. While these fundamentals remain paramount, dine-in restaurants are competing harder than ever against a myriad of quick and convenient options. So how do these establishments convince consumers to dine at the real estate these restaurants pay so dearly for, instead of in front of Netflix in their living rooms?
Some ideas being implemented include open kitchens that let guests see how their food is being prepared, self-serve craft beer taps that give customers more control over their experience, and interior design elements that incorporate local flavor. Consumer demand for memorable experience is also fueling growth of certain restaurant archetypes. Catering to the public’s growing embrace of ”foodie culture,“ food halls offer patrons a variety of local dining options in a fun, social atmosphere with a common seating area. After gaining initial momentum in the nation’s largest metros, these venues are now spreading to secondary and tertiary markets. Experts estimate over 200 total food halls to be in operation by the end of 2019. Forward-thinking developers are using food halls, both to anchor new projects, and to reinvigorate existing ones. Social dining is another growing restaurant format. Aimed at encouraging social interaction with strangers through elbow-to elbow seating in a communal setting, this model is finding a home in local, chef-driven eating establishments.
While some restaurants focus on “experience,” much of the industry is being pulled in the opposite direction by ever-increasing expectations of convenience. The same consumers who seek a novel experience on Friday evening, are looking for the most convenient possible option on their Tuesday evening commute. Drive-thru, delivery, and carry-out have all existed for decades, but they are only becoming more popular, aided in large part by modern technology.
Food delivery is evolving dramatically with the recent rise of mobile-app-based delivery services such as GrubHub, Door Dash, Uber Eats, Postmates, and a handful of others. A natural extension of ride-sharing services like Uber and Lyft, these apps are expanding delivery far beyond the world of pizza and Chinese food. In 2017, fast food titan McDonald’s began testing delivery at 200 restaurants in Florida. Today, through partnership with Uber Eats, they offer delivery at 5,000 US locations and 12,000 locations worldwide – though they are reportedly having issues keeping fries warm. Similarly, Chipotle partnered with Door Dash in April to offer delivery at 1,500 of its 2,500 locations. Papa Murphy’s, the bake-it-yourself pizza chain has been experimenting with delivery over the past 18 months and now offers delivery at over 400 locations, through a combination of third-party and in-house delivery.
Drive-thrus are only gaining relevancy and should be a top consideration when planning pad-site development. Long a staple of the fast-food franchise, more and more fast casual players are getting into the drive-thru game. Concepts such as Panera, Jimmy John’s, and Starbucks are increasingly locating, and relocating, at sites that accommodate their drive-thru model. Starbucks recently reported plans to build out 80 percent of its 600 planned 2019 locations with drive-thrus. Many won’t even have interior seating. The coffee giant reports that drive thru locations have 25-30% higher sales volume than those without. Fast casuals such as Raising Caine’s and Potbelly have fully embraced the drive-thru concept as well. Even Chipotle, with its intense counter Q & A, is rolling out drive-thru prototypes; however, these drive-thrus will only accommodate meals that are pre-ordered through the chain’s mobile app. The Mexican fast-casual leader is now prioritizing leases in spaces that can be adapted for drive thru use in the future, even if it is not part of the initial design.
Take-out service is on the rise as well. Most chain restaurants now have apps that allow customers to pre-order their food and either jump to the front of the line, or have their food brought out to their car. More and more restaurant leases contain provisions reserving parking spaces for “take-out only” customers.
As demand for delivery, take-out, and drive-thru service rise, restaurants can do more with less square footage. In the case of delivery, visibility and access become less important as well. This is bad news for landlords who, in recent years, have benefitted from intense competition among a wave of new fast casual concepts all vying for the same high-rent outparcels along busy corridors.
Moving forward, evolving consumer demands will have a polarizing effect on restaurant operations. On one end of the spectrum, full service restaurants have to become even more compelling destinations in order to compete for consumer’s time. This translates into increased experimentation with restaurant layouts and formats, and higher demand for restaurant space in atmospheric and walkable neighborhoods. On the other end of the spectrum, many establishments will ramp up efforts to cater to convenienceoriented diners, resulting in a decreased demand for large foot-prints and increased demand for drive-thru capability and take-out accessibility.