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Assessing the State of Restaurant Real Estate

RJ Hottovy
Sep 22, 2023
Assessing the State of Restaurant Real Estate

Earlier this week, we hosted a webinar with Emily Durham, Senior Vice President, Brokerage, Food and Beverage Advisory at JLL to discuss trends across the broader restaurant sector with a particular focus on the state of restaurant real estate. An on-demand replay of the webinar can be found here, but we thought we’d summarize some of the key points from the presentation below.

Despite Slowing Industry Visitation Trends, Restaurants Remain Attractive Tenants

Earlier this week, Darden discussed changing consumer behavior across its various brands. In particular, the company cited evidence of “check management” (less alcohol and entree sales) at Olive Garden and LongHorn steakhouse as well as softness among its fine dining brands like The Capital Grill and Eddie V’s due to pull-back from customers with household incomes above $125,000 (which may partly be tied to continued international travel trends, something we’ve spoken about in the past in The Anchor). Darden CEO Rick Cardenas nicely summed up how consumers are approaching restaurants: “There is a tension between what people want to pay and what they can afford, and they're going to continue to seek value, not always about low price. They're making trade-offs and food away from home is one of the most difficult things they can give up.”

Looking at visitation trends by category on a year-over-year basis (below), the slowdown across the restaurant category is apparent, especially among fine dining restaurants. Specialty coffee remains a bright spot however, which is likely due to slight improvement in return-to-work trends on a year-over-year basis, but also unit expansion from chains like Dutch Bros and increased suburban locations like Starbucks and Dunkin’ Brands.

Despite the slowdown in industry visits, Durham noted that restaurants are in high demand among malls and other commercial property owners and that real estate availability is difficult for many brands looking to grow. Like many things in the retail and restaurant industries, we believe the gap between slowing visits and restaurants still being in demand can be explained by migration patterns. We recently discussed McDonald's plans to resume unit expansion after essentially keeping its footprint in the U.S. flat for many years due to population growth across the South and Southeast, and we believe much of the demand for restaurants is coming from markets like Dallas, Houston, Austin, Phoenix, Tampa, Orlando, Nashville, and Charlotte that saw massive population growth compared to pre-pandemic levels. Smaller markets–another topic we’ve also covered this year–also likely explain some of the increased demand. Additionally, we also believe demand for more experiential and “eatertainment”-focused concepts has been driving demand among commercial property owners and operators, which leads us to our next point.

What to Make of Eatertainment?

When we checked in on the “eatertainment” category midway through the year, it was still outpacing the broader restaurant industry. However, like much of the industry, we’ve seen visitation trends stagnate in the later part of July and into August (below). Some of the aforementioned macro headwinds we noted earlier likely help to explain this, as does the heatwave across many markets over the same period.

Should the slowing visitation trends concern commercial property owners? At this point, the decrease in visitation trends is more likely driven by macro and weather related and we believe the category remains healthy. If we look at visit per location trends this year compared to before the pandemic, we see that eatertainment remains popular relative to casual dining chains and continue to see visits per venue well ahead of pre-pandemic levels. In other words, eatertainment concepts continue to drive visits to malls.

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank. R.J. also brings a wealth of experience with early-stage investments as a committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he advised over 50 food service companies on more than $200 million in early-stage capital raises and M&A transactions.

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