Resturant Trend project

Outlook: 2017

25 / NREI Outlook: 2017/ www.nreionline.com

The restaurant landscape has changed remarkably this year

as wage growth improved household balance sheets and

bolstered discretionary spending, which has supported a

33 percent rise in bar and restaurant sales since 2010. In

the year-long period ending September 30, 2016 sales at

bars and restaurants surged up 6.1 percent to $55 billion,

surpassing the $52 billion consumers spent at grocery stores.

The increase in restaurant and bar spending is the fastest rate

of growth among all retail categories, with the exception of

online shopping, and exemplifies the sector’s robust strength.

In addition to higher discretionary spending at restau-

rants, shifting consumer preferences and the widespread

use of applications such as Yelp and Urbanspoon are

feeding change in the restaurant sector. These online tools

are directing consumers to the most popular concepts that

enhance customer experiences. As a result, new chains and

some local eateries are gaining market share, while many

older chains struggle with slowing revenue streams and

traffic counts.

In this dynamic sector, fast-casual and delivery chains,

such as Del Taco and Domino’s Pizza, have performed very

well. On the other hand, chains such as Ruby Tuesday and

Bob Evans have announced location closures and Cosi,

Don Pablo and Garden Fresh Corp, the parent company

of Souplantation and Sweet Tomatoes, have filed for bank-

ruptcy. The expansion of quick service restaurants has

resulted in an explosion of new brands and locations and

has made this the largest segment in the net-leased retail

market.

The transforming restaurant environment, along with

diminishing retail construction, is having a positive effect

on overall retail vacancy, which ended the second quar-

ter at 5.8 percent nationally, down 40 basis points from

year-earlier levels. Improvement in single-tenant net-

leased space, which is being driven by the restaurant

industry, has been even more pronounced, with vacancy

sliding to 5.1 percent by the end of the second quarter. This

is positively impacting retail rents.

Since the 2010 recessionary peak, retail vacancy has

dropped nearly 200 basis points, spurring a rent gain of 8.1

percent during the same time frame to more than $18.80

per sq. ft. at midyear 2016.

“The strong performance fundamentals in the restau-

rant segment have strengthened investors’ appetites,” said

Glen Kunofsky of Marcus & Millichap’s Manhattan office.

“Transaction velocity has remained consistent over the

year-long period ending June 30, 2016, with the dollar vol-

ume for casual-dining establishments, such as Red Lobster,

reaching nearly $800 million. For a top-tier operator like

Red Lobster, the average cap rate has been in the mid-5

percent range. For smaller credit or regional and local

brands, cap rates begin in the low to mid-6 percent band,

while extending into the low-7 percent range,” Kunofsky

concluded.

For quick service restaurants, transaction velocity rose

considerably over the past year as well, with prices falling

between $450 and $1,500 per square foot, depending on

brand name and location. McDonald’s and Starbucks

stores trade at significant premiums to the average store-

front. The average cap rate for these assets was in the high-

5 percent band during the last four quarters, with deals

in the mid-4 to mid-6 percent range. Lease length and

tenancy are the most important investor considerations in

this segment.

As we look to the casual-eating establishment market

outlook in 2017, investors will focus on large established

chains for the bulk of capital inflow into the sector.

Struggling brands will trim locations, while new concepts

will continue to grow their market share. With respect to

the quick service restaurant outlook for 2017, the ease of

operations and brand recognition will continue to moti-

vate investors, particularly for single-tenant net-lease quick

service restaurant assets featuring tenants with strong

brand recognition in good locations. n

Bill Rose is a first vice president

and national director of Marcus &

Millichap’s National Retail Group and

Net Leased Properties Group.

The Changing Restaurant Landscape

By Bill Rose

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