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  • Writer's pictureRealFacts Editorial Team

The Unlikely New Real-Estate Darling: Restaurants


Restaurant interior

In a surprising twist, the restaurant business is now emerging as the hottest corner of retail real estate, a far cry from its reputation as a risky venture with a high failure rate. Property owners, who once viewed restaurants with skepticism, are now witnessing a significant shift as Americans dine out more than ever. This change is reflected in the surge of food service leases, which accounted for over 19% of all retail leases last year—the highest proportion for any category since 2007, according to CoStar Group.


Graph of U.S. household food expenditures

From Pandemic Lows to Record Highs


The restaurant industry has made a remarkable recovery from the depths of the pandemic when tens of thousands of establishments permanently closed. Four years later, robust restaurant leasing has powered the retail real estate sector to its strongest position in years. Brandon Svec, national director of U.S. retail analytics for CoStar, expressed his surprise at this development, noting, “We wouldn’t have seen as strong of a retail recovery without it.”


Americans' increased spending on dining out is driven by several factors: low unemployment, rising wages, the ascent of “foodie culture,” and millennials’ tendency to marry and have children later than previous generations. Single households are less likely to grocery shop, contributing to a greater inclination to dine out. In 2023, the average household spent nearly 53% of its food budget on food away from home, a record-high proportion, and up 10 percentage points from 2003, according to the U.S. Agriculture Department’s Economic Research Service.


Total restaurant sales have never been higher and are on track to surpass $1.1 trillion this year, a 5.4% increase from 2023’s record-high level, reports the National Restaurant Association. This rise in dining out has been a long-term trend, only briefly interrupted by the pandemic. By 2018, the average household spent more money dining out than on groceries for the first time since the USDA began tracking the statistics in 1997. Though restaurant spending plummeted in 2020, it quickly rebounded as establishments reopened and concerns about infection faded.


The Shift in Dining Culture


The resurgence in dining out has led to rising rents and occupancy levels for restaurants across the U.S. Retail real estate firm Pine Tree, for instance, reports signing new restaurant tenants at rents up to 10% higher than pre-pandemic levels. Chipotle Mexican Grill, one of the fastest-growing restaurant chains, exemplifies this trend. The company opened 271 new restaurants last year—the highest annual total in its history—and plans to add about 300 more this year. Most of Chipotle’s new locations include drive-through lanes for app-ordered pickups, catering to the convenience-seeking consumer.


Property Owners' Changing Attitudes


For years, property owners were wary of food tenants due to the high costs of building out restaurant spaces and the risk of early failure. However, the rise of creditworthy chains and data showing that food establishments boost foot traffic to nearby businesses have made landlords more eager to sign restaurant leases. “It’s definitely one of the darlings of our industry right now,” said Matt Lougee, president of capital markets for Pine Tree. The firm has seen average sales volumes among its fast-casual restaurant tenants increase by 6% annually since 2019, double the historic rate of increase.


Inflation and higher menu prices have contributed to increased restaurant sales, but customer demand is also up. Hybrid work models give suburban residents more flexibility to run errands and grab lunch during the workday, further supporting the restaurant boom.


Challenges and Resilience


Despite the overall positive outlook, the restaurant industry faces challenges. Rising payroll and ingredient costs are squeezing profit margins, particularly for independent operators. Seafood chain Red Lobster plans to close hundreds of stores after declaring bankruptcy, and McDonald’s sales growth has slowed as lower-income consumers cut back on spending. However, these challenges are not seen as indicative of a broader slowdown. McDonald’s sales volumes remain over 30% higher than pre-Covid levels, and Americans continue to spend more at restaurants.


“You have this long-term trend, which is ongoing, even now even though consumer tailwinds are a little less robust,” said Sara Senatore, senior analyst with Bank of America. “The industry as a whole seems to be growing.”


The restaurant industry's resurgence has taken the retail real estate sector by storm. Once considered risky, restaurants are now seen as vital tenants driving foot traffic and revitalizing retail spaces. As Americans continue to dine out in record numbers, the restaurant business remains a bright spot in the commercial real estate landscape, underscoring the dynamic interplay between evolving consumer habits and real estate market trends.

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