Restaurants Ready to Serve Up Expansions

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After quite a few lean years during the recession, many restaurants are setting their sights on expansion.

On a recent episode of “America’s Commercial Real Estate Show,” I talked with a panel of experts from the restaurant industry. They offered valuable tips to help restaurateurs succeed and gave insights into the state of this very competitive industry.

“I see expansion,” said Tony Akly, president of Restaurants Consulting Group Inc. “I think we will see 10 to 15 percent growth every year in the segments of quick service and ‘casual fine-dining’ where the average ticket is $50 to $60 per person.”

Robin Allen, executive editor of Nation's Restaurant News, cited many expanding brands including Firehouse Subs, Caribou Coffee, Yard House, Chick-fil-A, Smashburger and Five Guys.

Atlanta-based QS America is experiencing “very strong continued demand” and double-digit growth in two of its concepts — Fresh To Order and Brookwood Grill, said Pierre Panos, founder and CEO of the firm. QS America also owns more than 40 Papa John’s restaurants.

“I think that we will have relatively strong restaurant growth for the next few years,” Panos said of the overall industry.

Leasing Outlook

The market has changed for the better for restaurant tenants, Panos said.

“Landlords appear to give a little bit more and charge reasonable rental rates — that’s a good thing,” Panos said. “You can get reasonable rates and good tenant improvement.”

But sometimes the devil is in the details.

Landlords may want restaurant tenants, but aren’t always eager to accommodate them, said Jonathan Neville, a partner at Arnall Golden Gregory LLP whose law practice focuses on retail real estate and restaurants. Landlords might be reluctant to assume the additional expenses involved in converting a space into a restaurant, such as venting or impact fees.

“It looks like a great idea on paper, but when a landlord realizes that he will have to re-pave his parking lot in order to do a restaurant, suddenly it might not be such a good idea for that developer,” Neville explained.

Site selection for a restaurant is complex.

“It’s more than just location, location, location,” said Ackly, whose company specializes in restaurant design, construction and consulting. Ackley reports the main ingredients for success are visibility, access, parking, demographics — and of course, the economics of the leasing deal.

So, here’s a hot question. Is a site that was previously a failed restaurant still viable? Some might see cost savings since the site would already be customized for a restaurant, while others see it as a red flag because a restaurant failed there.

If the location is attractive, go for it, my guests say. However, it’s essential to thoroughly renovate and make the space your own. “You have to put in a new image and take those steps and put the money in to be able to say, ‘this is my space,’” said Panos. “People want new, they want different, they want fresh — they don’t want tired spaces.”

Once restaurateurs have narrowed their search and begin negotiating for their sites, there are even more factors to consider, said Neville.

One hot topic is tenant improvements. These are especially important for restaurant tenants who often require many modifications to sites, ranging from installing venting and grease trips to adding parking. “Tenant improvements right now in restaurants are such an important part of the deal,” Neville said. “It’s important that money gets into the tenant’s hand.”

Neville advises his restaurant-tenant clients to make sure the tenant improvements are enforceable. When negotiating leases, tenants also may want to ask for a way to enforce such landlord responsibilities as paying for certain utilities and making building repairs.

Restaurateurs might also request an SNDA (subordination, non-disturbance and attornment agreement) be signed by the lender. An SNDA protects tenants by ensuring the lender would honor the lease in the event that the landlord goes into foreclosure.

It Costs How Much?!

As if their business wasn’t challenging enough, restaurateurs face another looming obstacle.

“Obamacare” is expected to have a major economic impact on restaurateurs by requiring companies with more than 50 employees to provide health insurance for their workers or pay an annual fine.

“The bottom line is, if it comes in its current form it will cost our company $1.5 million straight off the bottom line,” said Panos. “If it costs us that much, how is a small guy going to be able to stomach that?”

Our panel of experts agreed it is a huge issue for small business people, especially considering that hospitality is the nation’s largest employer.

Don’t Forget About the Food!

With so much on their plates in this competitive business, restaurateurs still must remain vigilant about the quality of their product. “The importance of food quality can’t be overstated,” said Allen of Nation's Restaurant News. “We are seeing that you have a consumer with a more sophisticated palette, especially the younger people.”

Allen notes that Baby Boomers are eager to dine out and try new things, and more customers are interested in trying ethnic foods. “Food quality, different tastes and innovation are really important right now in the restaurant industry,” Allen said.

Healthy eating is also a major force in the market.

“Consumers more and more want a more healthful product,” Panos said. “People want something that’s full-flavored but also healthy.”

This is why his company developed Fresh To Order, which serves up fresh, high-quality foods like gourmet salads and panini sandwiches. The restaurants even feature computer kiosks to help customers eat better. For example, select “600 calories” and a list of menu choices will pop up on the screen that are all under 600 calories. “You can customize your meal based on fat, calories, sodium and your total nutritional content,” Panos said.

Service and continuous training are hugely important.

Social media has upped the ante when it comes to service. Restaurants are increasingly using tools like Twitter or Foursquare to attract customers, but they also face the ire of angry customers online. Restaurants need to have processes in place for monitoring and managing customer comments on social media, Panos cautions. They need to be prepared with instant responses, especially to complaints.

“Any restaurant company that ignores social media today, it’s at their peril,” Panos said.

The entire episode on restaurant business strategies is available for download at www.CREShow.com.

Michael Bull, CCIM, is the president and founder of Bull Realty, a regional commercial real estate brokerage firm based in Atlanta, and the host of the weekly radio show "America's Commercial Real Estate Show."

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