Emerging Concepts

The 4 Ways Higher Interest Rates & Real Estate Inflation Are Affecting Restaurants

In February, the National Restaurant Association’s 2023 State of the Restaurant Industry Report found that 70% of operators felt that their restaurant’s conditions had settled into or were on the path to the “new normal.” Competition was heating up, and growth was expected to continue. 

And, while some of those expectations came to pass, the rising costs of land, rent, and loans have taken their toll. Rising construction costs, interest rates, and unrelenting supply chain disruptions are causing restauranteurs to alter their expansion plans as the summer of 2023 takes hold.

Let’s explore how the current economy and real estate challenges are affecting the restaurant industry. 

Rising Interest Rates

From March 2022 to May 2023, the Fed raised interest rates 10 times, an unprecedented approach to rising inflation not seen in decades. Commercial real estate investments decreased by 57% year-over-year in the first quarter of 2023. In response, commercial real estate valuations have fallen. The result: uncertainty and slowing expansion plans. 

According to Aaron Allen & Associates, some chains are using almost one-third of cash flow to cover rising restaurant interest rates. While cheap rates fueled growth, climbing rates have made it difficult to keep up. For some operators, interest rates have doubled in the last seven months. Conversely, there are a few brands with no outstanding long-term debt, including Texas Roadhouse and Chipotle. 

These rising rates are also making it more challenging to attract investors. In response, some restaurants are approaching the growing headwinds by undertaking the following: 

  • Restaurants Searching for Smaller Footprints

The cost of real estate and occupancy as well as guests’ changing preferences and labor challenges have resulted in restaurants looking for smaller locations. With a greater focus on takeout and delivery, they’re finding they can serve the same number of customers while reducing costs. 

One example is PF Chang’s To Go. These restaurants have removed indoor seating and range from 1,500 to 2,500 square feet. These to-go-only restaurants are currently found in Colorado, Florida, Illinois, New York, and Texas.

  • Turning to Food Halls to Lower Rent

According to ArentFox Schiff law firm, there were less than 50 food halls around the country in 2010. Today, there are over 300, with 145 in development in early 2023. Many of these foodie-heaven centers are finding demand in today’s mixed-use developments

The benefits? Higher profit margins and reduced costs. Restaurants joining the food hall community usually earn from 15-20% profit. In many cases, vendors pay a base rent plus a percentage of their sales. Because food hall owners usually build the space, including stalls, operators find a much lower point of entry.

One of the more recent openings is Julia & Henry’s food hall in Miami, an upscale arena that recently opened in June 2023. 

  • Ghost Kitchens & Pop-Ups

From the ashes of the pandemic arose a ghost. In need of off-site income, restaurants turned to ghost kitchens, creating brands and cooking on-site for a delivery-only model. No aesthetics to create or dining room to maintain or servers to pay for resulted in a leaner operating budget and the need for a much smaller space. 

A recent report by Yelp found that the restaurant industry is showing signs of growth, particularly in the pop-up sector. These short-term offerings entice guests with their unique menus and limited time. It’s a dining format that triggers customers’ curiosity and pushes them to act, ensuring they “don’t miss out.”

  • Additional Revenue Streams

While some operators thought their journey into delivery would be a short-lived stop-gap during the pandemic, it’s clear that this additional revenue stream is here to stay. In response, companies like Chowly are providing online ordering, integration between POS systems and third-party delivery services, and much more to help restaurants thrive in this new normal. 

Another exciting revenue stream that offers a unique opportunity is F&B Insights Menu Monetization. This platform creates sales performance reports generated from the vast amount of data your POS system holds. These valuable insight-rich reports are sold to new or existing suppliers eager to see how their brands are doing in your establishment. 

Finding the Best Location for Your Unique Concept

At Emerging Concepts, we work with leading restaurants and entertainment concepts, helping them select the best locations that ensure reduced risk and optimum performance. Then, we negotiate with landlords and developers, positioning you most favorably and fairly. 

Are you ready to explore the possibilities and reach your business goals? To learn more about partnering with our team of real estate experts, data scientists, and business professionals, or to schedule a complimentary consultation, contact Emerging Concepts today. 

 

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