Growth could await restaurants in a position to snatch them up.
Closed doors, occupancy limits, and spaced-out tables—it’s a restaurant landscape customers have come to know all too well. But for many operators, these adjustments weren’t enough to keep doors open. In September, Yelp released an economic impact report indicating that nearly 20,000 U.S. restaurants have closed since COVID-19 began.
“People are still in the stabilization stage. We’re somewhat past the mass store closures,” says real estate attorney Matthew Weinstein with the law firm Cozen O’Connor. “But the mom-and-pops have been decimated, as well as the restaurants that are in cities that have been closed down.”
As bleak as this reality is, it could bring new opportunities for restaurants with the liquid assets to jump on vacant spaces. The current market favors buyers, which has forced landlords to be more flexible with potential tenants
“Now is a great time to look. My landlord clients would love to have looks right now,” Weinstein says. “They understand a few things: for one, that [restaurants] might not be able to open until later in 2021. And that’s OK.”
He adds that potential tenants have been entering conversations with landlords wherein they lock in a lease at a lower cost, even if the restaurant doesn’t move in until next year. Weinstein foresees the restaurant industry being especially keen to capitalize on real estate in high-traffic areas.
Nevertheless, consumers shouldn’t expect to see new restaurants popping up anytime soon. Weinstein estimates restaurants need around nine months to fully transform their new spaces after they come to a lease deal with landlords.
“The stores that just straight up closed—where you have to [fill] it and refixture it—I think that’s the piece that’s really missing from a lot of the analyses,” Weinstein says. “You’re talking about nine months when you look at the legal piece of it because [restaurants] need the lease, and there needs to be a buildout.”
He anticipates many restaurants will start shopping for real estate in early 2021. Those bullish to look now are aiming for spaces that support off-premises capabilities. Assets with large parking are especially advantageous, as Weinstein has been seeing structures like pad sites (out-parcel buildings in the same parking lots as larger commercial centers) become lucrative options. He recently had one restaurant even choose a pad site over another location that had historically brought in more traffic.
Amid the pandemic, the importance of space means restaurants with tight-squeeze floor plans in bigger cities are at a disadvantage. Compared to suburban spaces, al fresco options in cities are often limited to a handful of tables.
As more city concepts hit the dine-in ceiling and are forced to shutter, brands waiting to tap into the urban market will have more real estate choices than ever before. Prior to COVID-19, ghost kitchen brand Kitchen United had to call landlords to find viable spaces. Chief business officer Atul Sood says now the reverse is true; Kitchen United has more power in the selection process.
“What I see from the real estate market perspective is that urban markets are being hit more than suburban markets,” Sood says. “And so there are opportunities opening up in cities like New York and Chicago, where, New York in particular, there’s been an exodus.”
Based in Pasadena, California, Kitchen United isn’t a restaurant concept but rather a company that provides fully equipped kitchens to restaurants for their off-premises business; its physical spaces can house multiple brands under one roof.
Kitchen United currently operates in four cities, but the pandemic has accelerated growth plans, with the potential to expand to hundreds of locations in the next three to five years.
Sood says the company now has an upper hand in negotiating with landlords, who are more amenable to certain concessions and tenant improvements. But it’s not just landlords who have become more flexible in the real estate search. Sood has noticed a shift in restaurants as well—namely, their willingness to downsize.
“I talked to a number of executives across the restaurant industry in the last three months, and many of them mentioned that they will be building smaller-footprint restaurants with more space dedicated to takeout and delivery,” Sood says.
Brandon Landry, founder and CEO of burgeoning chain Walk On’s, is one such proponent of this less-is-more mentality. Before the pandemic, the sports bar/grill looked for spaces sized around 8,000 square feet. Now Landry says he’s entertaining spaces 75 percent that size.
“I think the biggest thing that we’ve seen is the fact that we can still do the amount of sales with half the seats being available. We can definitely lower our development costs,” Landry says.
Landry was encouraged to rethink space when he saw Walk On’s year-over-year sales up from 2019, even though its stores have been at 50 percent occupancy. The brand has been working on a prototype to fit the restaurant shift; takeout orders have accounted for 25–27 percent of sales compared to 9 percent pre-COVID.
Landry says the current landscape is tough for restaurants, with only a few locations as well as independents. But for brands that were strong going into the pandemic, he predicts those concepts—including Walk On’s—will be strong coming out of it, too.
“Not that we want anyone to shut their doors, but it’s inevitable,” Landry says. “There are going to be great real estate opportunities out there.”