Conventional wisdom within retail real estate for decades was that restaurants were bad. Developers feared that they would suck up parking that would otherwise go to mall shoppers. Retailers viewed restaurants as competitors for a customer's retail dollar. Worse, they require larger footprints and restaurant operation is inherently messier than retail.
Times have definitely changed.
Lifestyle centers have been a whopping success in no small part due to the popularity of their dining offerings. Today, developers are rushing to build more of these restaurant-heavy properties. (Morgan Stanley estimates that lifestyle centers account for 65 percent of the development pipeline.) And owners are going back to older regional malls and adding the same sit-down restaurants. As a result, restaurants are the second fastest growing segment of the retail sector in 2006, trailing only discount stores and accounting for 17.6 percent of openings, according to research by Colliers International.
“This trend that started five to seven years ago has heated up dramatically,” says Jerome J. Herman, principal of Cleveland, Ohio — based J.J. Herman & Associates, Inc. and a member of the Council of International Restaurant Real Estate Brokers (CIRB). “Now, if you look at lifestyle centers, you will see at least four or five restaurants as an integral part of the development.”
Far from being a detriment to retail properties, restaurants are helping the bottom line. Restaurants pay rents starting in the low $20's for a standard lease and some pony up to $50 per square foot for highly sought-out pad sites, according to Richard Lackey, chairman of the Palm Beach, Fla. — based Lackey Companies and founder of CIRB.Restaurants also don't eat into parking supply as much as developers feared and, in fact, lead to shoppers coming to a retail property and staying longer.
So developers are upping the share of space in properties for restaurants.
For example, Federal Realty Investment Trust, which focuses on open-air centers, is aiming to have 30 percent of its 17.7 million square feet devoted to restaurant tenants. Similarly, Urban Retail Properties, which manages 40 million square feet nationwide, devotes between 10 percent and 20 percent of its open-air and lifestyle center projects to restaurants.
Regional mall players are following suit. At a recent Retail Marketing Society meeting, Bruce Tobin, COO and executive vice president of leasing with Simon Property Group, revealed that the developer has been using vacant department store space to bring in restaurants like the Cheesecake Factory.
“Our job is to deliver to the customer what they want and restaurants are now a very important part of our business,” he said.
The reverse is also true, as restaurants in retail settings tend to outperform standalone concepts. According to Devon Wolfe, global practice leader for retail, restaurants and real estate with MapInfo, a location intelligence provider, being in a high-traffic shopping center can drive up a restaurant's sales volume by 30 percent to 40 percent. At the same time, retailers get a boost because people stay at the property longer.
“The name of the game here is synergy,” Wolfe says. “The longer people stay at a property, the more opportunity there is for everyone to do business.”
According to Chuck Patty, principal of Norfolk, Va. — based Fortress Capital Investors and co-owner of Sonoma Wine Bar, an upscale restaurant that opened at the Town Center of Virginia Beach in November 2005, Sonoma sees a greatof walk-ins because of its location.
“We happen to be in a building that is on a pedestrian plaza that the Town Center is built around and the management provides three nights a week of live entertainment, including a three-string quartet and a guitar player,” Patty says. “And people who were there for the entertainment and shopping will come in for an appetizer.”
If Sonoma Wine Bar continues to be successful at Town Center, Patty and his partners are considering expanding the concept to three or four locations throughout the Carolinas and the Mid-Atlantic states, targeting other lifestyle properties.
Lackey remembers a time when shopping center owners looked at restaurants the way residential landlords often look at children — they were thought to be messy and noisy and tended to scare off more desirable tenants. “Department stores didn't want a restaurant within 100 feet of their entrance,” he says.
Today, though, restaurants have a greater impact on consumption patterns today than they did in the past. In 1955, when the mall era was in its infancy, restaurants accounted for 25 percent of the food industry's sales volume, according to the National Restaurant Association. Today, it's nearly double that, with restaurants accounting for 47.5 percent of all U.S. food sales. Put another way, on a typical day 130 million people will patronize a restaurant, resulting in $1.4 billion in industry-wide sales.
Though, no hard industry-wide numbers exist to prove that having restaurants at a property drives up sales volume and foot traffic, there is research that shows where people who eat at full-service restaurants tend to shop. According to a survey conducted by Worthington, Ohio — based BIGresearch, up to 37.6 percent of respondents who ate at a full-service restaurant four or more times a month buy most of their clothes at department stores. The next most popular after that are discount stores and specialty apparel sellers.
In the BIGresearch study, the typical restaurant customer also had an average household income of $65,483 a year. In other words, they are the customers that shopping center owners rely on for most of their business.
The main worry owners have about restaurants right now is whether the lackluster spell that has hit the casual dining sector in recent months will continue. A Wachovia Restaurant Watch report notes that same-store sales for the sector dropped to 1 percent in the second quarter of 2006, and are expected to dip further, down 1 percent in the third quarter. But Ashley Woodruff, senior restaurant analyst with Friedman Billings Ramsey & Co., believes this is a passing phase.
“Dining out became a way of life for U.S. consumers and they give it up very reluctantly,” she says. “Once gas prices stabilize, they will go back.”
Another change in the industry is the major players. Fast-food chains are not the fastest-growing segment any longer. That distinction belongs to concepts like Buffalo Wild Wings and Chipotle.
Twenty years ago a mall's food court would be dominated by players such as McDonald's, Burger King, Wendy's, Ranch1, KFC and maybe a salad bar and an independent Chinese food vendor.
In fact, most of the full-service establishments that can be found in shopping centers today did not exist until the 1980s. The first Applebee's opened in 1980. The Olive Garden followed in 1982. Today those two chains are the most popular casual concepts in the nation, according to BIGresearch.
Meanwhile, Famous Dave's and PF Chang's came on the market in 1994 and 1996, respectively. And Brio Tuscan Grille, a more recent staple of the shopping center scene, only opened its first location in 1999.
Today, successful restaurant operators like Brinker International, Lettuce Entertain You and others that already have dozens of concepts are constantly experimenting with new ideas, consequently there is no shortage of possible restaurants for owners to woo.
Restaurants as anchors
The rising importance of restaurants is having a big impact not just on tenanting decisions, but also on operational ones. Some owners have extended mall operating hours to better dovetail with restaurant schedules.
Gerald Divaris, chairman of Divaris Real Estate, a Virginia-based leasing and management firm, says that since restaurants have entered the Town Center of Virginia Beach, a Divaris-managed mixed-use property that contains 650,000 square feet of retail space, sales at some stores have increased by as much as 25 percent. He believes that having several types of eating establishments — a steak house, a pub, an ice cream parlor — keeps the customers on the property for a much longer period of time than they might have originally intended.
“People will come in and make an evening out of it,” he says. “They will go to the steak house to eat dinner, and then to the theater, and after the theater, to a dessert place and in between all that movement they are also shopping. Some of our retailers are now opening at 10:30 in the morning and close at 11:00 p.m. instead of 9:00 p.m. to be more in sync with the restaurants because they find that in those two hours they do a tremendous amount of business.”
Divaris has a rule, however — if the restaurant wants to be located on the ground floor, it has to be open for both lunch and dinner. While most people find that evenings and weekends are the most convenient times to shop, it is weekday lunches that provide the greatest benefit for other retailers.
“The stores are very quiet during the day because most people are at work. The only real customers are the older people and the young mothers who are looking for a place to eat,” says Chuck Lanyard, principal and director of the restaurant division with the Glen Rock, N.J.-based Goldstein Group. “If you give them a place to eat, they will shop too.”
Restaurants now are viewed in some circles as mini-anchors in an era when department stores have lost their appeal.
“Restaurants are, in essence, traffic generators that bring people to the project and depending on the character of a restaurant, they might have long waiting lines so people will roam the shops while they are waiting for a meal,” Divaris says. “There is not much impact if you have only one or two, but if you have eight or ten, they can be as effective as an anchor.”
According to Steven Warsaw, president of leasing with Urban Retail, the company considers the collection of restaurants at its recently opened Branson Landing mixed-use project in Branson, Mo. as a mini-anchor complement to Belk Department Store and Bass Pro Shops. The property features such tenants as Sullivan's Steakhouse, Liberty Tavern, Cantina Laredo and Famous Dave's.
“We will end up with 10 full-service restaurants at Branson Landing or about 20 percent of the entire GLA,” Warsaw says.
And unlike big national chains, of which there is a finite number, restaurants offer much more variety. If the shopping center next door has a PF Chang's, there is always the possibility of signing up a popular regional player.
“When you look at the restaurant category — there is almost an unlimited range of choices,” says Chris Weilminster, senior vice president of leasing with Federal Realty. At the company's Rockville Town Center, 40 percent of the property is devoted to restaurants.
Bryant Siragusa, national director of mall restaurants and entertainment with CBL & Associates Properties, Inc., says that such variety helps developers cater to different customer segments. At its Gulf Coast Town Center in Fort Myers, Fla., the tenant base will include nine restaurant concepts, including national players PF Chang's, Outback Steakhouse and Bar Louie as well as local favorites Blu Sushi and Calistoga Bakery Café.
“What we are trying to do is get the mothers with the strollers during the day with the likes of PF Chang's, and then we attack the nighttime crowd by stretching the entertainment component of the evening with something like Bar Louie, so they can take it into the later hours,” Siragusa says.
In mixed-use developments, restaurants are also an attractive draw for hotels and office buildings.
“They find that when they are near restaurants they are absolutely packed because the business tourists like a place where they can park their car and have a choice of food,” Divaris says.
“And if they offer lunch, it's an important amenity to the office worker. The restaurant is definitely a glue that holds the whole mixed-use thing together,” he says.
As tenants, restaurants offer a number of advantages, not the least of which are attractive rents. According to Scott Griffin, president of Southfield, Mich. — based Griffin Properties/Griffin Restaurant Group and a member of CIRB, restaurants are willing to pay up to 20 percent more in rent than typical retail establishments.
“If you have an office building with one medical user, for that user the rent is generally higher because the build-out is more expensive, you have more plumbing requirements and electrical work,” says Griffin. “The same is true of a restaurant — there is a greater water demand, there is a greater electricity demand and they take more parking.”
Restaurants do have greater parking requirements than other retailers, requiring between 10 and 12 spaces per 1,000 square feet vs. the overall formula of 4.5 spaces per 1,000 square feet. But developers now believe that's offset because customers being who are drawn in end up staying at a property after their meals.
In addition, one rarely discussed benefit of having a restaurant on the property, particularly in a traditional shopping center, is that they prefer to build out their own space.
Many of the most popular mall-based chains target “pad sites” located right outside the mall entrance. According to Lanyard they want to be easily accessible and visible from the highway. But because every restaurant has its own décor requirements, a typical tenant will often spend up to $2 million to build out the space.
“And they don't take it with them if they leave,” Lanyard says.