5 Ways Real Estate Can Unlock Restaurant Growth

September 16, 2020

Many Americans have shifted to doing just about everything virtually, from work to school to happy hour. But for restaurant owners, a physical location remains the anchor of their business—after all, they can’t serve or deliver a meal from the sofa of their living room.

It’s no secret that COVID-19 has had a massive impact on the restaurant industry.

Yelp, which provides local business ratings and reviews, has found that as of the end of July, 15,770 restaurants had permanently closed across the U.S. At the same time, consumers are flocking to proven brands positioned to meet new requirements with tools like order ahead, contactless payment, delivery, and drive-thru.

Widespread closures, coupled with consumer demand for the convenience of quick-service establishments, have created an opportunity unlike any other for current and potential franchisees. That’s why in this moment of rapid change, real estate asset strategy should be at the center of the go-forward plan for any franchisee.

Now available: pre-built locations

Some of the largest restaurant franchisors like McDonald’s and Starbucks, as well as large franchisees of national brands like NPC International, have announced their intent to close hundreds of locations nationwide. Over the next few months, we’ll see an influx of available sites, from standalone buildings to non-traditional storefronts, with existing infrastructure like drive-thru lanes and commercial-grade kitchens that make them appealing to other restaurant occupants. Whether expanding your portfolio of restaurants or entering the restaurant space for the first time, these sites provide the perfect ‘pre-built’ space for your new location. Franchisees who don’t want the complexity of a full construction project should look to these opportunities.

Keep your location, switch your brand

Location, location, location. That’s the age-old mantra for real estate success. But while you may have a great location, you might not have the other part of the business equation that adds up to profit—a brand in demand. If your franchise agreement is up for renewal, this could be the moment to keep your location and make the switch to a brand that has the menu and ordering options guests are seeking. Not only may this be a sound long-term business pivot, our experience suggests a 15–40 percent reduction in development costs when converting an existing space versus a completely new shell building or ground up development. Speed to market is also a tangible benefit in evaluating a conversion of an existing property. Those initial cost savings, speed to market, plus stronger sales from a successful brand, could unlock future opportunities to expand your franchise portfolio.

Independents’ former locations becoming available

Research by the Independent Restaurant Coalition has found independent restaurants account for 76 percent of all restaurants in the U.S. It’s quite unfortunate, but due to the challenges of COVID-19, many of those independent restaurants could permanently close their doors by the end of this year—meaning those spaces will likely be back on the market. As with previously franchised locations, independent concepts have elements like commercial-grade kitchens that may make them more suitable for a restaurant occupant, but likely less for many others. While some may lack drive-thrus or abundant parking that would be required of a traditional quick-service restaurant location, their proximity to vibrant communities or mass transportation hubs could make what would typically be a less traditional choice, a more attractive one.

Low interest rates make drive-thru and off-premises additions more appealing

With dining rooms closed or limited in capacity, brands have seen a massive increase in online, carryout, and drive-thru ordering. Additionally, consumers are looking for easy ways to pick up their food without having to interact with other guests, which is why ‘retro’ concepts like drive-ins have made a comeback in 2020. If your current location or brand lacks the ability to serve consumers in their cars, ultra-low interest rates could make once out-of-reach renovations a realistic possibility, subject to municipal approval.

While a drive-thru may seem like running an additional business out of your restaurant and can be a significant cost, drive-thru sales can account for 65 percent or more of the revenue for some restaurants. Drive-thrus attract consumers who may have literally driven past your business because it wasn’t convenient; what’s more, drive-thru checks are often higher than in-restaurant dining. A less expensive option could be a pick-up window to serve guests who specifically order ahead. Either way, adding throughput capacity to serve additional off-premises guests and attracting new ones by improving your existing asset could lead to the boost in sales and return on investment you’re looking for.

Lock in a long-term lease while strong tenants and brands are in demand

For reasons mentioned in the paragraphs above, landlords may not have quite the leverage they had just a few months ago. It’s not only restaurant operators who have been impacted, but nearly every business segment in America. That leaves those looking for new space or seeking to extend the lease on an existing location in a near-term position to capitalize on the commercial real estate market’s current instability and future outlook. Landlords may be more willing to negotiate on lease terms or add years to a lease at favorable rates if they know they have a tenant who can pay in full and on time. Negotiating with landlords can be an additional way to leverage your real estate asset to unlock cash flow for your business.

No doubt, the franchisees best positioned for success pre-COVID were those backed by strong franchisors, but moving forward they must also be grounded in solid decisioning around real estate. Many factors are placing those franchisees in a stronger position to leverage great real estate to spark additional growth. With interest rates at record lows, incentives for development being offered by multiple chains, along with unprecedented opportunities in many real estate markets, there is truly no better moment for franchisees to make their next move.

Don Crocker is the Chief Development Officer of Inspire Brands. Inspire Brands is a multi-brand restaurant company whose current portfolio includes more than 11,000 Arby’s, Buffalo Wild Wings, SONIC Drive-In, Rusty Taco, and Jimmy John’s locations worldwide.

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