Emerging Concepts

How COVID-19 is Reshaping Commercial Real Estate for Restaurants

It seems the COVID-19 pandemic knows no bounds for disruption, from shuttering big-box retail staples to completely changing the way restaurants operate.

And while many business owners are struggling to find ways of surviving their current crises, the pandemic is set to forever reshape another aspect of the food industry—the commercial real estate sector.

Here are just a few ways commercial real estate has already changed during the pandemic.

Changing Lease Agreements

Several cities, including food hubs like New York City and Los Angeles, are proposing new measures to allow businesses to break their leases without penalty because of business disruptions due to the pandemic.

In California, Senate Bill 939 would prohibit a landlord from evicting a business or nonprofit entity from its property if they can’t pay rent. Restaurants and other small businesses would be allowed to renegotiate their leases if they have lost more than 40 percent of their revenue.

New York City Council recently passed a measure to prohibit landlords from enforcing personal liability provisions in their rental agreements—which allows landlords to go after their tenant’s personal assets for unpaid rent and fees. The bill applies to defaults that occur from March 7 to September 20.

The trend has even caught wind in Memphis, Tennessee where businesses are adding provisions to commercial real estate contracts that allow the contract to be suspended or terminated for force majeure events until the event ends.

While these provisions won’t help closed businesses reopen, they could help struggling businesses survive the pandemic. A recent report by S&P Global Market Intelligence found that the number of restaurants at risk of defaulting on their loans and lease agreements rose above 30 percent in April. Before 2020 began, that figure was as low as five percent.

However, as experience has shown, these provisions will certainly alter lease agreements for the foreseeable future as landlords seek to insulate themselves from the increased risk lawmakers are asking them to assume.

Unfortunately, it’s reasonable to assume this extra risk will eventually flow down to tenants in the form of higher rents and termination fees. Restauranteurs with leases soon to expire should be vigilant and read through their lease agreements before renewing. It is usually good practice to bring a lawyer to discuss the implication of the lease terms.

E-Commerce Friendly Spaces

One aspect of the restaurant industry that has undoubtedly been altered by the pandemic is the percentage of business generated by dine-in services. But, as more consumers stayed home to flatten the curve of the pandemic, e-commerce sales for restaurants skyrocketed.

One prime example is Dickey’s Barbeque Pit, which saw its online sales jump 122 percent in a month. The Dallas-based restaurant also saw its store sales increase 14 percent and its social media impressions jump by 322 percent.

Similarly, The Zacher Group, a Fort Wayne, Indiana-based commercial real estate firm projects that the accelerated e-commerce demand generated by the pandemic will result in more store closings as restaurants struggle to adapt to the new ways of selling their products to hungry customers.

Restaurants utilizing third-party delivery services like Grubhub and Uber Eats are well-positioned to mitigate their losses during the pandemic, but the switch to an e-commerce driven business model will require a more thorough approach. Facebook recently entered the e-commerce marketplace by launching Shops, a platform that allows small businesses to set up free e-commerce storefronts on Facebook and Instagram that are easy to manage. The program also utilizes third-party services like Shopify, BigCommerce, and Woo that can help small businesses grow their brand.

These developing trends will ultimately force the restaurants of the near future to redesign their commercial space to make them more e-commerce friendly.

Increased Value for Drive-Thru Space

Drive-thrus have traditionally been an afterthought in American restaurants. The 2019 QSR Drive-Thru study found that the lanes cost restaurants a total of $178 million in revenue because complex menus disorganized kitchen staff and led to inaccurate orders.

But, as restaurants across the country see in-person sales wane thanks to state lockdowns and social distancing orders, the drive-thru lane is experiencing a renaissance moment in its history. Now, restaurants are pining for pad sites to accommodate more drive-thru business.

One development on Hawaii’s Big Island perfectly captures the increased value business owners are placing on these sites. The Noka Fair Development includes four pad sites capable of holding restaurants up to 3,000 square feet, according to the property documents. The property owners are offering 20-year ground leases for between $200,000 and $240,000.

These developments are not only benefitting large chains like Burger King or Chick-fil-A, but they’re also helping small businesses such as Williamson Bros. BBQ in Atlanta and food pantries across the country.

Williamson Bros. originally planned on closing all three of its metro-Atlanta stores when Mayor Keisha Bottoms-Cole required all restaurants to shut down dine-in services. However, the restaurant made a makeshift drive-thru in their parking lot and was able to stay open.

The increased value of drive-thru lanes for restaurants is part of the reason commercial real estate analysts are bullish on the market’s ability to recover from the pandemic slowdown. Analysts at Urban Land, a commercial real estate research firm, expect restaurant real estate to return over 12 percent this year, even though restaurants themselves are expected to see over $50 billion in losses before the pandemic ends.

Restaurant owners should expect to see the land value of their real estate increasing in the coming years. This will make it especially important for business owners to review the terms of their lease agreements to see who is responsible for paying property taxes. Businesses looking to expand their drive-thru capabilities may find it more expensive to do so as well.

Retail Spaces May Become Food Halls

It seems that every day there is news of another big-box retailer filing for bankruptcy. J.C. Penny, Victoria’s Secret, Papyrus, Lucky’s Market, and Pier 1 Imports are just a few of the names on that list.

And while it is certainly reasonable to question whether the American shopping mall is in jeopardy of disappearing altogether, restaurant commercial real estate analysts are prudently watching these trends with a bullish eye towards rejuvenating the food hall business model.

Malls in Canadian cities like Ottawa, Toronto, Montreal, and Winnipeg are already experimenting with this trend. Some have exchanged their McDonald’s for craft beer, tacos, and exotic specialties in hopes of luring customers back to the forsaken grounds.

Cushman & Wakefield Executive Managing Director Trip Schneck recently told Houston Business Chronicle that the food hall is the way of the future for restaurants. He argues that increasing retail prices will drive restaurants to band together to lease a single space rather than try to afford it on their own.

The market seems to support Schneck’s prediction as food hall developments are popping up around the country, even though the restaurant industry is still reeling from the coronavirus pandemic.

In California, Fullerton’s city council recently okayed a development plan for a bar, a brewery, and a food hall near the restored Fox Theatre in downtown; Hendricks Commercial Properties in Boise, Idaho is seeking approval to build a food hall in a 119,000 square-foot space; and, several developers are vying for commercial space in Milwaukee to build similar projects.

Recent reports by Cushman & Wakefield estimate that there will be over 300 food halls across the country by year’s end. However, with the pandemic forcing restauranteurs to rethink their business models, it is safe to say that this estimate is on the conservative end.

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