Investors in real estate with a restaurant component are finding themselves in a glass half-full, glass half-empty kind of environment. On the one hand, strong demand for retail space from the food and beverage sector is pushing up rents. On the other hand, a shortage of retail space in desirable neighborhoods and rising rents are forcing some restaurants and bars to cut back on expansion plans or turn to new strategies to serve their customers.
These are among the findings of CBRE’s recent Global Live-Work-Shop report. The year 2022 saw the national average asking rent rise 2.5% to an all-time high of $22.78 per square foot, while the nationwide retail availability rate fell to 4.9%, according to the report. “In some cases, owners are receiving upward of a dozen offers on a listing, leaving many would-be restaurateurs unable to enter desired markets and putting significant pressure on the brokerage community to deliver results in hyper-competitive landscapes,” the report states.
These trends made 2022 one of the strongest years on record for the retail real estate market, CBRE found. At the same time, developers confront some challenges to future growth. Higher construction costs – predicted to rise 5.4% in 2023 – are affecting deal-making and rising interest rates are making financing more difficult. Competition for suitable sites is intensifying.
From the restaurants’ point of view, many retail locations that are available are either in undesirable areas, require significant capital outlay or have rents too high for the business to operate profitably — a situation unlikely to change if the retail development pipeline remains clogged, the report notes.
In addition to changing the way they operate by modifying their service options, CBRE expects restaurants to try to cut costs by investing more in drive-through or pick-up windows, as well as in new technology. They are also likely to focus on high-growth markets with lighter regulations. “They may also scale back expansion plans due to higher construction and financing costs,” the report states. And they may try to modify percentage rent clauses in leases based on revenue, on the grounds that their recent sales increases are driven more by inflation than profits.
It all adds up to an expectation of lower demand this year than in 2022. “Many restaurant companies have secured their real estate pipelines for 2023 and 2024 already, with a view toward 2025 and even 2026. Given the sparse development pipeline, investors will remain in a strong position, but may see some turnover as higher rents price out restaurants contending with slim profit margins,” the report concludes.