Market Data

New Restaurants Provide Entree Into Local Markets

Roughly 870,000 U.S. restaurants achieve approximately $426 billion in sales annually, making them a significant part of the economy and a major retail real estate component. To break into this potentially lucrative market, brokers should be aware of current industry trends and learn strategies for marketing sites to restaurant companies

Regulatory Restrictions on the Rise

Increasing municipal restrictions on development are a growing concern in the restaurant industry. Therefore, restaurants look at the regulatory environment first when entering a new market.

The three most common restrictions planning commissions institute are drive-through bans, building appearance standards and development unity ordinances, and parking restrictions. These regulations may affect a restaurant's ability to construct its prototypical building and, in some cases, may prevent a restaurant from entering a market.

More-stringent planning standards are a product of local governments' desire to encourage smart growth and improve quality of life. Most rezoning restrictions come from the planning staff, based on its interpretation of local governments' overall directives. Unfortunately, many of these restrictions don't appear in development codes; they are discussed in comprehensive plans, but exact zoning issues are not fully addressed. Thus, rezoning applicants have to negotiate with the planning staff to address issues that are part of the non-codified plan. In most cases this involves a conditional-use rezoning.

Conditional-use rezonings involve restrictions above and beyond the traditional zoning ordinance: Applicants must agree to additional conditions that apply only to the rezoned property. For instance, a conditional-use rezoning may restrict building heights to 25 feet when the ordinance allows 50 feet or require the development to have sidewalk connectors though the codified ordinance does not.

Consequences of a Slow Economy

Today's restaurant patrons are tightening their pocketbooks and trading down one price point. For instance, patrons who regularly chose Ruth's Chris Steakhouse a few years ago now might go to Sullivan's Steakhouse to shave $10 per person from the bill. The true winners are value-oriented restaurants, where customers feel they get the maximum amount of food for their money. For example, last year Golden Corral Buffet and Grill reported a sales increase of 8.4 percent over 2001.

The fast-casual segment is another winner in this economy. Restaurants such as Baja Fresh, Chipotle, Cosi, Panera Bread, and others benefit from consumers who prefer to spend money on quick carryout food rather than table service. Fast-casual restaurants' small sizes also contribute to their success. Many popular corridors rarely have 1.5-acre to 2-acre sites available, so restaurants that can go inline or on smaller pads can find more locations.

Restaurant properties may include vacant land, empty restaurant buildings, possible conversion candidates such as banks and free-standing retail, and inline retail space. Pent-up demand for such sites contributes to the hottest markets' continued strength. Infill areas in these markets draw top prices, as do sites near new developments or malls. Also, many developers are sticking to their prices, as they would rather pay the all-time low interest rate carrying costs on the vacant land than lose their profit potential.

As the recession hits restaurants already on the fence, numerous vacated properties are coming on the market. While most chains prefer to start from the ground up utilizing proven prototypical layouts, some find value in rehabilitation opportunities. A chain can roll out stores rapidly if it is adaptable to different layouts and appearances. A good example is Darden Restaurants' Smokey Bones, which uses other restaurants' disposed sites, allowing it to enter markets quickly in premium locations. For this restaurant, the instant market penetration and quality sites outweigh the negatives of non-prototypical buildings or layouts.

Marketing Know-How

Today's restaurant companies are more selective about their locations' criteria. Factors that weigh heavily in the site selection process include proximity to strong retail and entertainment draws and hotels, high traffic counts, heavily populated areas that match the restaurant's targeted customer profile, and daytime office population. Projected trends or demographic changes in the area are other important elements.

Such narrow criteria affect how brokers market sites to restaurants. A low lease rate or sales price is no longer sufficient to seal a deal. Restaurants typically require these items in a site submission package: competition and retail maps, aerial photos, traffic counts, demographics, and deal terms.

“What sort of volume is the restaurant doing?” restaurateurs frequently ask on market tours. Brokers often exaggerate the answer, but claiming that every restaurant is the chain's highest-volume performer or does twice the national sales average only serves to diminish credibility. Reliable sales volumes for local restaurants is one of the most important tools a broker can have. Restaurant district managers and chain restaurants' annual reports are good sources for this information.

Brokers also need to be well versed in restaurants' special needs and building codes, such as hood systems that vent through the roof; outside coolers; electrical and heating, ventilation, and air conditioning loads in excess of normal retail standards; and bathroom requirements. A restaurant equipment company or architect can explain these requirements.

Other sources of industry information are Nation's Restaurant News (www.nrn.com) and state restaurant associations, which keep tabs on restaurants leaving and entering a market. Brokers also can affiliate with other restaurant brokers to build a referral network.

Restaurants are increasing their use of local brokers, who find many benefits to working with these clients. Restaurants usually want high-profile locations and the overall deal size (in dollars) is higher than typical retail transactions. Restaurateurs are very hardworking individuals but know how to have a good time, and brokers can eat in a lot of great restaurants while researching markets.

Brokers with restaurant industry backgrounds or restaurant deals under their belts are best able to meet the needs of restaurants looking for sites and the needs of property owners looking for restaurants. But even brokers without industry savvy or experience can make an impact with thorough market knowledge, the study of restaurant operations and trends, the right professional credentials, and lots of energy and hard work.

William M. “Marty” Kotis III, CCIM, CPM

William M. “Marty” Kotis III, CCIM, CPM, is president of Greensboro, N.C.-based Kotis Properties, the largest restaurant developer in the Carolinas. He also is president of the Council of International Restaurant Real Estate Brokers. Contact him at (336) 574-2000 or wkotis@ccim.net.

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