Recently, Crain’s New York Business revealed the economic trends impacting both the commercial real estate markets and the restaurant industry. One of the greatest impacts restaurants currently face is the increased debt burden brought on by high interest rates and inflation.
According to a Lending Climate in America survey conducted in the second quarter of 2024, over 66% of respondents saw rising interest rates as a threat to the economy. Additionally, 100% believe food service may experience some volatility in the near future.
On the positive side, the slowdown in inflation and the promise of interest-rate cuts may provide the restaurant industry with some relief.
The Commercial Real Estate Market
According to the New York Times, banks, concerned about the struggling office segment, began quietly dumping their commercial real estate loans a few months ago. These investors are looking to reduce losses by divesting commercial portfolios.
Commercial foreclosures are also climbing, and properties are being sold for much lower prices, which could also signal some relief for the restaurant industry. Crain’s reported multiple sales over the last several months that came in at double-digit discounts compared to prices a decade ago.
With the anticipation of lower interest rates comes the hope of a recovery in the commercial real estate sector.
The Restaurant Industry
As customers grow more cost-conscious, casual dining is up, and so is the search for the ideal retail spaces. According to Modern Restaurant Management (MRM), the markets that are seeing the most growth include Arizona, Florida, and Texas. Conversely, the areas showing some slowdowns, particularly in the retail space due to increasing theft, are Chicago, New York, and San Francisco.
Some of the spaces showing a greater demand include those with outdoor patio spaces and room to develop pickup spots for takeout. Increasing demand has also been noted for electric charging stations in parking lots.
A Call for Smaller Markets
Satya Guduru, CEO at Janapriya Upscale USA spoke with MRM about the call to smaller markets. This results from the higher construction costs along with the higher land costs in the bigger markets, leading to the need for significant upfront capital investments. The lower costs associated with the smaller markets offer restaurant investors a better and quicker return on their investment.
The Effect of Restaurant Closures
Unless you’ve been living in the outback, the recurring news of the closure of high-profile restaurants is hard to miss. These closures represent vacant prime commercial real estate space and an opportunity for new restaurants and remaining tenants to secure better lease agreements. There is also the opportunity for mixed-use developments to further their hold in the market.
We Sell Restaurants
If you head to the popular site for selling restaurants, “We Sell Restaurants,” you’ll notice a growing number of listings. In fact, in August 2024, the company experienced a record number of sales for the year.
Looking at the 10 top restaurants for sale, you’ll find a restaurant in Colorado Springs that generates annual earnings of $72,000 going for $150,000. Another fully equipped, turnkey restaurant is priced at $99,000. A lakefront restaurant in Texas with annual earnings of $800,000 also hit the market.
Second-Generation Sites
Until new buildout costs lower significantly, operators are more prone to take advantage of second-generation restaurant space, letting the prior operator spend the buildout money. You can further lower startup costs if these restaurants have usable equipment and furniture or a secure liquor license.
Of course, if you’re buying a second-generation location, you want to be keenly aware of why the restaurant went out of business. Did the location have anything to do with It, or was it the concept? How is the visibility and access? Explore the comparative restaurants in the area and determine if oversaturation could be a factor.
There’s a tremendous amount to consider when selecting a new location for your expanding enterprise. That’s where Emerging Concepts comes in. As a real estate agent for the nation’s top restaurants and entertainment concepts, we support positive growth through data-backed science and extensive real estate and restaurant knowledge. To learn more about finding the ideal locations in a tight market, contact Emerging Concepts.
