Commentary: Commercial real estate market rebounding

April 10, 2011

By Mike Spilky and Mike DiNorscia

The entrepreneurial spirit that has for years driven restaurants to expand and grow is finally coming back. From late 2008 to the first quarter of 2011, restaurateurs halted or curtailed expansion plans entirely. Some closed stores while others spent all their time and energy on cutting costs and innovation rather than unit growth. Additionally, some larger restaurant brands cut back by laying off real estate managers and other development staff.

From cautiously optimistic to outright confidence, restaurateurs are now calling their brokers, ramping up their real estate personnel and looking to expand their brands. However, this time around, expect successful concepts to grow with a more disciplined development strategy.

Repositioning and redevelopment ahead

The commercial real estate market, with overbuilt suburban markets, are feeling the worst effects from the downturn. In particular, retail properties such as shopping centers and street retail buildings, where the majority of all restaurants are located, are currently still in a general state of malaise.

The U.S. Census Bureau reported that shopping center construction spending declined by 2 percent in February; it was the 30th consecutive year-over-year monthly contraction. That said, the turnaround in retail development will begin with the repositioning and redevelopment of existing retail centers.

The exception in the commercial real estate market has been in more densely populated, affluent urban communities. These communities have been less affected by unemployment declines, typically serving two strong dayparts at both lunch and dinner. This translates to a densely populated office community combined with a densely populated residential base.

In California, for example, these locations would be akin to portions of West Los Angeles, Del Mar in northern San Diego, and Newport Beach in Orange County.

For restaurateurs, now is an opportune time to take advantage of the real estate market. Asking rents for retail space across the board are at 5-year lows and landlords are motivated to fill their space with qualified tenants. In some instances, larger landlords have been saving up and are offering more tenant improvement dollars than our industry has seen in a long time.

For example, a recent restaurant lease negotiated by our team, Location Matters, received more than $125/ft. in tenant improvement dollars.

There also are many closed restaurants available for sale where operators can take advantage of existing foodservice space and, sometimes, equipment left behind. We recently received a list of closed restaurants from a large nationwide mall operator that exceeded an estimated 100 units of varying sizes.

We also have noticed further closings and consolidations around the country of full-service restaurants. Claim Jumper has closed a number of stores within the last 60 days. In the last nine months, Location Matters has leased a closed Claim Jumper, a Chili's, a Johnny Carino's, and a closed Pat & Oscars; all of which required no cost to acquire the space.

Solidifying capital and choosing an appropriate site

To take advantage of these repositioning and redevelopment opportunities, the key in the industry has always been access to available capital. In this market, many of the smaller, less corporate restaurant brands in the four- to 15-unit sizes have been able to attract available capital.

Specifically, the fast casual segment is seeing the most development velocity out of all the segments in the industry. We expect these restaurant operators to continue the search for A+ sites in urban and street retail environments. And as these sites are absorbed and asking rents increase, new development likely will return. Restaurants positioned for success moving forward will be those that acquire long-term leases and lock-in low rental rates in visible and accessible A+ locations.

What is an A+ site and how do you determine that a site meets the perfect criteria for your restaurant? First, it is important to have a deep understanding of your concept, brand and ideal customer. Then you can better identify what sort of demographic criteria your restaurant will thrive from.

Next, factors such as accessibility, visibility and parking will play integral roles in understanding the site's ability to succeed. Sales volumes of similar area restaurants will also give you some valuable insight. Finally, there is nothing better than using your "gut" to tell you if the location feels right.

Our gut tells us there is no better time than now to get off the sidelines and start taking advantage of the opportunities available in the restaurant real estate marketplace.

Mike Spilky and Mike DiNorscia are the cofounders and managing partners of Location Matters Inc., a full service Retail Commercial Brokerage with a specialized restaurant leasing and development team that focuses on tenant services, landlord services, restaurant sales & acquisitions and retail investment sales services.

Topics: Business Strategy and Profitability , Franchising & Growth , Operations Management , Restaurant Design / Layout

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